Due to X's terrible financial performance, Elon Musk now has an upper hand negotiating with the banks. But Fortune has learned that that three of the seven lenders that funded Musk's deal to buy Twitter may have formed a group designed to protect themselves from the chaos that would be associated with a fire sale, according to a source familiar with the deal.
Because of the shocking deterioration in X's finances since Musk took over in October of 2022, the lenders haven't been able to sell the debt to investors as planned, and are stuck holding all of it on their balance sheets, this person explained. The only way they'll unload the loans is by accepting deep discounts from such possible buyers as hedge funds and other customers for distressed assets. To fortify their position, Morgan Stanley, Barclays, and Bank of America, lenders that combined furnished almost 70% of the financing, have agreed to what's known as a joint "sell-down letter" that expires on Jan. 15, the source told Fortune. Though all three banks declined to comment, and the exact details of the arrangement aren't known, sell-down letters typically require that if one bank receives an offer for its loans, it can't accept without giving the other members the right to the same deal on a pro rata basis.
That structure prevents the lenders from falling prey to a "divide and conquer" approach where shoppers set the banks against one another in an auction to the bottom.
Fortune's reporting also found that the banks are extremely frustrated by the poor flow of financial information supplied by X. The banks are encouraged that new CEO Linda Yaccarino is looking for a CFO who will hopefully give them a much better look at the books. But for now, the dearth of data prevents the lenders from presenting full a full package to potential purchasers, according to the source that spoke to Fortune.
In a recent story, this writer speculated that Elon Musk himself is in a powerful position to purchase a big chunk of the debt pile that's haunting X at a sharp markdown, or securing a solution where the banks simply write off some of the loans, a move that would improve X's standing, enabling them to safely syndicate the rest.
We don't know Musk's next move. We do know that the information drought makes it tough for his lenders to sell to anyone else.
