I. The loan. How banks avoided the astronomical risk of $13B.
$44B = $24B + $7B + $13B.
$44B is the price at which Elon Musk privatised Twitter. He raised $24B through his Tesla stocks. $7B through his other sources. And $13B as a loan from the banks.
Here, the banks were smart in giving the loan. The $13B were raised through bonds. Now, these bonds were sold to smaller investment firms/banks, whatever they are. The main banks avoided the risk of loss by doing this.
$13B was not a single bond. But numerous small valued bonds that add up to $13B in total. These smaller bonds were then given by the banks at some interest rate to smaller investors. The smaller investors purchased these bonds as per their capacity.
II. A clever strategy that is a win-win for everybody, but at a very high risk.
The loan taken by Elon Musk is not in the name of Elon Musk, but it is in the name of Twitter. The collateral given to the banks is Twitter stocks, that if liquidated are enough to cover the principal + the interest. As to why this strategy is more beneficial than taking a loan in Elon Musk's name, is said below.
If the company generates some profit. The installment(+interest) per annum will be taken away from the profit. The amount given will be considered as an expense. Expenses are not taxable, some are not. The profit will also be reduced, but profits are taxable. Hence less tax payment for the company. A win-win situation. But with a very high risk.
If the loan is taken in Elon Musk's name, then he also pays tax, the company also pays tax. More money given in tax. Unnecessary money given in tax.
Hence, the loan is taken in the company's name.
III. What are the security measures banks placed for themselves, that I know of.
The 1st security measure is generation of $13B through bonds distributed in the market. Not giving the sum out of their pockets.
The 2nd security measure is the floating interest. Floating interest varies as per the market condition. The banks may impose any percentage of interest to recover their loss. Of course some limitations may be there, but you get what I mean. Variable interest.
The 1st security measure of bonds is explained in part I.
About the 2nd security measure. If the market perception of Twitter is negative, then the banks have no option but to lower the prices of the bonds per unit for them to be sold and generate money. Banks need to reduce the price of bonds per unit because the buyers are skeptical. Leading to a loss on the banks' side.
But they are not the ones who need to cover up for the lost money. They can increase the interest rate imposed on the loan taken. This right is given to them through the floating interest. Of course, some kind of moderation may be there on the maximum percentage of interest imposed. But I don't know about it.
So, this is how Twitter was bought. But...
IV. Risks to ordinary people.
Unlike India, about 50% to 60% of Americans are in the cash market. That is a lot. As mutual funds are also used to be invested in bonds.
The bonds were sold to small investment firms. These firms surely want to generate money from that by creating bonds of their own and selling them.
Now suppose, if Twitter fails, it should not, but if it does, then it will create a domino effect.
The bank syndicate supporting Twitter will not be able to give out the interest promised on the bonds. The small investment firms will not be able to give the promised interest to their customers. Ultimately, it is the common person, knowingly and unknowingly, that suffers.
Thus, putting a big dent in the economy, which is already struggling, for the time being.
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I hope this MyTake was worth your time. Thanks for reading!
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