Elon Musk has a financial problem

The root of Musk's financial problem

In the early months of 2022 Elon Musk, all spiced up on being declared the richest man in the world, started buying Twitter stock. He had sold some of his Tesla stock and the money was obviously burning a hole in his pocket. Actually, more to the point, Musk likes the attention he gets on Twitter, and was a serious buyer. So much so, that he went clear through the regulated 5% to almost 10% before he bothered to announce his holding. Whether or not he will be taken to task on that is a matter for future historians.

There was some suggestion that he would join the board, but when it was made clear that as a board member he could not acquire more than 14.9% of the stock, he walked out. There was talk about a poison pill, which left him in a position to either sell the stock or buy the whole lot. I imagine the Twitter board made it clear that if he was going to buy the whole company he should come with cash.

A few days later (yeah, really) he came running, waving facility letters from lenders, just in time to get his rocks off on another derivative of "420"; April 20th.

The finance was made available in various facilities, at various interest rates as shown in the table below.

Musk's financial problem is Musk's financial problem

A lot of the debt is in his personal capacity. But he has also added a good portion onto the Twitter balance sheet. He owns the Twitter balance sheet.

At the time of signing the facility agreements reports suggested that he would have to pay interest of $1B in April 2023. That is interest alone, and based on the rates ruling at the time of signing.

But then the world changed. For some reason he had not seen the influence of Russia invading Ukraine in February as a possible problem for the world. Nor had he seen that the central bank would take an interest in dealing with the rising inflation rate. 

He famously sent a note to his bankers asking them to slow the deal down because "it won't make sense to buy Twitter if we're heading into World War III." But let's think about what the bankers' thoughts would have been. The debt is covered for the most part by Tesla stock to 5 times the value of the loans. The bankers have no interest in saving Elon Musk from himself.

Edit 16 December 2022

The USA Secured Overnight Finance Rate (SOFR) has continued to rise since this blog was first published. On 15 December it was hiked to 4.32% The facility table now looks like this:

Musk's financial problems are just beginning

But that’s not all. In the 420 week, Tesla shares closed the week at $335. The following week they closed down 13% at $290. In the week of “on hold” they traded as low as $211. For the next two full months they traded between $212 and $250.

So at the time of his “on hold” tweet his debt would cost him about 10% more and his Tesla shares would be 37% down on the calculations he agreed for his bank’s commitment letters which speak of security of $65Bn worth of his Tesla stock. That amounted to 64 million shares then. On that share price drop, he would have to pledge 50% more shares. Originally it was about one third of his Tesla stock. On the share price two weeks later he would have to pledge 50% of his Tesla stock.

But that’s really not all… In the “on hold” week Twitter’s share price dropped 18% to $40. He agreed to pay $54.20. That probably stings a bit.

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