Shulou(Shulou.com)11/24 Report--

Three people familiar with the matter said today that some banks that provided Elon Musk with a $13 billion loan to buy Twitter are preparing to account for their loan losses this quarter, but they must ensure that they do not cause a significant drag on their quarterly earnings.

Typically, banks sell such loans to investors at the time of trading. But market participants say Twitter lenders, represented by Morgan Stanley, could face billions of dollars in losses if they try to do so now. Because in times of economic uncertainty, investors try to avoid buying risky bonds. Twitter is also in poor shape, with advertisers fleeing, revenue declining and its ability to pay interest on debt questionable.

But banks must still value loans at their market value and provide for losses reported in earnings reports. However, three people familiar with the matter said today that in the absence of a fixed price, determined by actual sales of debt, each bank could decide how much to write down based on its market research and judgment.

One person familiar with the matter said the largest of those debts, a $10 billion loan backed by Twitter assets, could have to be written down by as much as 20 per cent. Of course, the loan was provided by seven banks, and the impact was managed by several companies, so it did not have a significant impact on profits.

Another person familiar with the matter estimated that some banks might write down only 5% to 10% of the secured portion of the loan. The move comes as Wall Street banks expect their fourth-quarter profits to fall due to plunging revenues and rising loan-loss reserves amid a weakening global economy.

Three banking sources said the remaining $3 billion in unsecured loans could lead to bigger losses at seven banks. It is unclear how much the bank plans to write down on that loan.

A person familiar with the matter said the lending bank had considered replacing the unsecured loan with a loan backed by Tesla shares. But Musk has said that in the current macroeconomic environment, it is best to avoid such loans.

In addition to Morgan Stanley, banks that provided loans for Musk's Twitter acquisition were Bank of America, Barclays, Mitsubishi UFJ Financial Group, BNP Paribas, Mizuho Financial Group and Societe Generale.

According to accounting rules, the banks must mark their loans at market value when they report fourth-quarter earnings in January, several bankers and accountants said.

But with market activity stalling, banks have considerable flexibility in how they value loans. This means that each bank may value it differently. They have a lot of leeway in how they report writedowns and how long it takes to sell debt. For example, it took years to liquidate leveraged loan transactions after the 2008 financial crisis.

A person familiar with the matter said each bank conducts market research with two or three potential buyers to calculate the value of the loan, but ultimately needs the approval of auditors. If valuations continue to deteriorate, some banks may initially take smaller hits and then write them down over time, the person said.

Alternatively, expected losses may be split between investment banks and trading desks, making them small enough not to be disclosed separately. Any writedowns are likely to be broken up over several months to reduce the impact on earnings in any one quarter, two people familiar with the matter said.

Some market participants expect losses from this debt to be substantial unless market conditions improve. Two banking sources said that if banks tried to sell loans now, they would not be able to get more than 60 per cent of the face value from the secured bonds. The unsecured portion is even cheaper, costing the lending banks billions of dollars overall.

Wall Street banks, led by Bank of America, took a $700 million loss in September on the sale of about $4.55 billion in debt backing a leveraged buyout of Citrix Systems, a business software company.

By contrast, the bankers who backed the Twitter deal were more optimistic. Morgan stanley CEO james Gorman said earlier this month: "I have a lot of confidence in musk. We will not support that kind of business and opportunity unless we believe it is real. "

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