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Can someone who understands finance ELI5 the section about the financing: > "To finance the Proposed Transaction or a Potential Offer, entities related to th

• martincmartin 5y ago
  It's like buying a house with a mortgage. You wouldn't say you're buying a $1MM house for $200k just because you had a 20% down payment.
• HWR_14 5y ago
  If you had a signed letter that GS was willing to loan you $43 billion, you'd get taken seriously too. If you want to bid on a house, you'll need a signed letter promising a loan of (house price) on it from a bank to be taken seriously (or cash reserves)
• bombcar 5y ago
  The debt is banks agreeing to loan Musk $3 billion because they know he's good for it. The second letter is banks agreeing to margin $12.5 billion against an unspecified amount of Musk's stock, and the last is Musk pledging the rest (or something like this). You can promise all you want, but you have to get the bank to be willing to pony up the money - but what you're describing can and does happen - leveraged buyouts were common in the past. https://en.wikipedia.org/wiki/Leveraged_buyout https://en.wikipedia.org/wiki/Leveraged_buyout You find a company with no debt (say, TLSA) and you believe it is undervalued, so you convince banks to loan you enough money to buy TSLA and pledge TLSA itself as the collateral. If the purchase goes through, you now own TLSA and a TLSA sized debt. If it doesn't, nothing much happens.
  • nonameiguess 5y ago
    Frank McCourt's tenure as owner of the Los Angeles Dodgers is a good illustration of this dynamic. He purchased the team with effectively no cash, he and his family proceeded to treat it as a collateral asset to take out lines of credit to buy themselves personal luxury goods, bankrupted the team, then when the league forced him out, he sold for a profit and made a few billion dollars anyway thanks to the value of MLB television contracts and that's just the way being rich works, I guess.
    • lotsofpulp 5y ago
      That is the way that betting correctly on the future value of an asset works. There are many people who have lost money the same way because the value of the asset went down and so they walk away with nothing.
      • mvid 5y ago
        If the downside is walking away with nothing on a bet that you put nothing on, then I think it’s always worth the risk
        • lotsofpulp 5y ago
          Sure, but those kinds of deals are rare, especially absent corruption. A cursory Wikipedia search shows the baseball team owner referenced above put up significant real estate as collateral.
        • solveit 5y ago
          Yes, all the downside falls on the lenders because that's how investing money works. If you can get someone to loan you hundreds of millions, you should (in a purely economic sense) take it because all you can lose is everything you have.
    • spoonjim 5y ago
      He used effectively no cash but pledged his Boston parking lots as collateral for the debt. So if he had defaulted on the debt his lenders would have gained ownership of the Dodgers AND of the Boston parking lots.
• jjoonathan 5y ago
  Because the people who wrote those letters don't trust you to pay up if stonks go down by 100x your net worth. They trust Elon, though, because he has more net worth. I'm taking a broad definition of "trust" that includes "we can sue you and recover the money."
  • gavinray 5y ago
    Ah, so it's a reputation/wealth-based thing. That makes sense. By that logic though -- if you're a billionaire, could you try to buy every profitable company on borrowed money? Eventually you'd make the money back and since you don't have to pay anything out of pocket, you effectively have $INFINITY dollars to bargain with.
    • shkkmo 5y ago
      Each new loan would have increased scrutiny due to the other loans you carry.
    • leetcodesucks 5y ago
      Trump and Gordon Gekko did this
    • pydry 5y ago
      You could try but it'd probably work out for you about as well as when the hunt brothers tried to buy up all the silver on earth.
    • nabla9 5y ago
      It's not reputation based. Musk as requested secured enough loans to pay with cash. His ownership in SpaceX/Tesla is the collateral (as well as his Twitter shares if he buys them). He has no "infinity" of anything. It's called leverage and it probably maxes out around 60-70% of everything he owns.
      • naveen99 5y ago
        seems crazy to take that much leverage when you are worth $200B. the shorts must be salivating at a chance to force a margin call on him, just for fun. Would have been better to just do a tesla twitter merger for free.
• mritchie712 5y ago
  Do you think it's reasonable Elon could secure the funding if he wants to? I'm quite confident he can and I think most reasonable people would agree. however, I'm not confident "anyone" could secure the funding, so they can't "do this"
  • ep103 5y ago
    I am not confident, no.
    • emteycz 5y ago
      That's so unreasonable you should go more into it or just leave it. It's literally the richest man of Earth, banks are falling over themselves to stuff him their money.
      • kasey_junk 5y ago
        Matt Levine went into it yesterday why funding the Twitter purchase might be hard for Elon Musk. https://www.bloomberg.com/opinion/articles/2022-04-20/elon-checks-his-pockets https://www.bloomberg.com/opinion/articles/2022-04-20/elon-c... The long and short of it is that the people who would lend him money may not trust him due to his previous (and erratic) statements.
        • KptMarchewa 5y ago
          He literally provided SEC a guarantee from Morgan Stanley to lend him the money. That's what OP posted.
          • MrMan 5y ago
            Not all the money
        • bombcar 5y ago
          Matt Levine is great but he's just an entertainer, and not even a day later we have evidence filed with the SEC that he is wrong.
• hiq 5y ago
  Exhibit D looks like he's borrowing some money (12.5B USD) with TSLA as collateral, unless I'm misreading it.
• rguillebert 5y ago
  That's literally what people do when they buy a house, except in that case, that debt is probably backed by Elon's Tesla stock.
  • a4isms 5y ago
    Yes, but the hoi-polloi don't get to write off their mortgage interest as a tax deduction. "The rich have all of the money and pay none of the taxes. The middle class pay all of the taxes and have none of the money. The poor are there just to scare the shit out of the middle class so they keep going to those jobs." —George Carlin, 1937-2008 UPDATE: As some replies have pointed out mortgage interest on a primary residence is permitted in some form in six countries: The Netherlands, Switzerland, the United States, Belgium, Denmark, and Ireland. If you live in one of these six countries, my comment does not apply to you. If you live in any of the nearly 200 other countries in the world, it does. YMMV: "Your Mortgage-interest-deductiblity May Vary."
    • mason55 5y ago
      > Yes, but the hoi-polloi don't get to write off their mortgage interest as a tax deduction. What a strange example to pick. That's, like, THE major write-off that most people have. It just gets obfuscated by the fact that most people don't go over the standard deduction.
      • a4isms 5y ago
        I think this varies between jurisdictions. I believe it is deductible in the USA, but not here in the People's Republic of Kanuckistan, although there are ways around the limitation, depending on your appetite for the risk of a drawn-out battle with the Canada Revenue Agency. Up here, home mortgage interest is only deductible if the home is used to generate income, so it does not apply to people who use a home as their primary residence. But what if you have a home office? What if you use it as an AirBnB some of the time? If you ask a tax accountant whether Canadian home mortage interest is deductible, they will answer "a definite maybe." But it's actually "no" for most people who don't structure their home ownership around qualifying for a deduction.
• benchtobedside 5y ago
  This breaks down to: a) $21 billion of Elon's ("Reporting Person"; see item #1) own money b) $12.5 billion in margin loans arranged by Morgan Stanley c) $13 billion in debt from Morgan Stanley
  • alecbz 5y ago
    Can someone ELI5 margin loans? How is it different than using an asset as collateral?
    • bri3d 5y ago
      A margin loan is just a loan where securities are the collateral asset. The major feature of a margin loan versus other types of loans collateralized by assets is that the value of the underlying security (collateral) is tracked and depending on the terms of the margin loan, the lender has the right to issue a "margin call" demanding additional collateral or cash if the underlying securities have declined in value. These rules, called "house requirements," vary from lender to lender.
    • bombcar 5y ago
      As the other poster said, it's a special type of collateralized loan where since everything is known, it can be done automatically. You can get approved for a margin account at TD Ameritrade right now, and then later decide to margin some shares for whatever reason. The bank doesn't need to check your collateral because it knows how much it is worth at any given moment when the market is open. Mortgage loans are not nearly as formalized, and the bank will send out an appraiser to verify that the property is worth an amount that they're willing to loan against. And once you get past that, it becomes very hand-wavy; banks making loans to governments, non-profits, private companies, etc will all have their internal departments that make decisions about how much the risk is and what premium they'd need to charge.
    • HWR_14 5y ago
      Margin loans use commonly traded commodities, normally stocks. Because they are easy to value (compared to a house) and liquid they are easier to get. However, because they are easy to value, they get compared to the loan value constantly. You'll be allowed to borrow X% of the values of your shares. If they go up, you can borrow more money. If they go down, you have to immediately pay off part of that loan. Since X < 100%, you can do so by selling shares (but of course, that decreases the amount of the collateral you have again), but you could also just deposit cash or pay it another way. They normally are more than happy for you to not have to sell shares if you deposit money.
• csande17 5y ago
  > (including, with respect to the Margin Loan Facility a condition which requires that the borrower thereunder satisfy a maximum loan to value ratio of 20%, which is expected be satisfied by the contributions of a portion of Mr. Musk’s unencumbered shares in Tesla, Inc. to such borrower) Musk is putting up some of his Tesla stock as collateral on the loans. The effect of this is pretty similar to if Musk had sold his Tesla stock and used the money to buy Twitter, but avoids some of the tax and regulatory consequences of doing that.
  • lotsofpulp 5y ago
    The big difference is the lending terms will surely require the borrower to do something such as sell assets or deposit more money if the value of the collateral (and/or the asset being purchased) falls below a certain amount.
  • im3w1l 5y ago
    Borrowing against your shares is like taking out a mortgage on your home. You still get to live in it (dividend + voting rights), and you are still exposed to swings in value. And you can end up underwater.
    • blip54321 5y ago
      It's a little bit different. Most of the ultra-wealthy live on debt. Here's the basic scheme: - Let's say I own $10B in startup.com stock, but haven't sold it. My income tax burden is $0. - If I sell the stock, and taxes are 40% in my country, I get $6B, and the government gets $4B. - If I keep the stock, and borrow against it, I pay no taxes, but I do pay finance fees (e.g. interest). The finance fees work out to less than taxes. The trick is to never realize gains or income. Debt lets you do that. One more trick is that a lot of purchases are "investments." If I buy a mansion, yacht, and Picasso on debt I can use them. When I'm bored of them, I sell them, and pay off that debt. I've probably made money on the mansion and Picasso, and lost money on the yacht. I've paid a little bit of interest and a little bit of tax, but much less than I would have otherwise.
      • 5y ago
• luciusdomitius 5y ago
  Do you provably own quarter of trillion USD of equities? This is exactly what the very stupid people never seem to understand about wealth - net worth is not cash under the mattress (nor on a "Savings" account). Musk (as well as Bezos, Dorsey, etc for that matter) probably has less than a hundredth of a promile of his wealth in cash. One of the main reasons is that today's cash is in essence a rave-club bracelet - you need it for every day transacitons but as a store of value it is useless to harmful. The whole idea of today's currencies is for the financially illiterate people to get robbed of their savings. You don't become that wealthy by being that stupid. Edit: I used billion instead of trillion, apologies
  • nightski 5y ago
    Being uninformed does not make one "very stupid".
    • luciusdomitius 5y ago
      Not being aware of it and not admitting being uninformed does make you 'very stupid' though.
  • edgyquant 5y ago
    > The whole idea of today's currencies is for the financially illiterate people to get robbed of their savings. No it isn’t, the financially illiterate don’t tend to have much savings anyway. The point of controlled inflation is to prevent the financially literate from hoarding cash as an appreciating asset and provide tooling to alleviate economic crisis. Considering your quote I’d question just how financially literate you yourself is.
    • luciusdomitius 5y ago
      Yes. I know very well that this is the justification (and a justification can be invented for anything). Now it is your turn to explain to me how does this fact contradict my statement that the drawback of such paradigm is that it makes it useless as a store of value? Hint: It doesn't - you just stated a completely separate fact as if it is logically incompatible with the original argument.
• User23 5y ago
  > What follows seems like Elon is "paying" for Twitter with... imaginary money. The vast majority of money is "imaginary" in the sense that it's just liabilities on some bank's balance sheet, AKA bank deposits. > Why can't anyone do this? I'll promise you a bunch of debt and equity, too. Anyone can do this. Nothing is stopping you from writing me a note for $1,000,000 and me writing you a note for $1,000,000. This leaves us both a million richer in assets and a million poorer in liabilities. At that point even hinkier stuff can happen like me using your note as collateral on a loan to further expand my balance sheet. The tricky part is getting third parties to accept our IOUs. US Banks have no such trouble thanks to their membership in the Federal Reserve system. This is one major reason why a banking license is such a huge deal.
  • deleted 5y ago
    [deleted]
• colechristensen 5y ago
  Elon has a lot of equity in ownership of tsla, spacex, etc, no doubt plenty of other things. Instead of selling for cash and buying Twitter with cash, he’s taking out loans based on assets he owns. On top of that there will probably be “imaginary money” where a bank will give him money to buy Twitter with Twitter as collateral, but not the whole thing, just part. I.e. loans against his personal capital will provide a kind of down payment for loans against the value of Twitter. In this scale it’s called leverage, banks loaning you a multiple of assets you’re willing to risk. It is quite common for people with extreme net worth to take loans out against assets instead of selling them.
  • justinsaccount 5y ago
    > It is quite common for people with extreme net worth to take loans out against assets instead of selling them. Especially when selling those assets would require paying capital gains taxes.
    • asdfqwertzxcv 5y ago
      Doubly so when the interest on these loans is tax deductible. This is why he and most other wealthy people pay 0 taxes - he never has a taxable event, like selling stock. He just uses his stock as collateral to take out loans and writes off the interest.
      • KptMarchewa 5y ago
        At the end, where does he get money to pay interest?
        • colinmhayes 5y ago
          More loans. As long as the stock's value is going up he can pull more equity out
          • Kylekramer 5y ago
• jeltz 5y ago
  Way more people than Musk can do this. You just need a bank that trusts your ability to pay and who thinks the size of the transaction is worth their time.
• voldacar 5y ago
  1. banks loan elon money 2. elon uses this money to buy twitter
  • laichzeit0 5y ago
    3. Elon pays banks interest each month for said loan money 4. Interest is cheaper than tax Elon would pay if he sold those shares instead of borrowing against them.
    • skinnymuch 5y ago
      4 is true but doesn’t show how insane of a diff it is. The interest is going to be tiny. It isn’t going to be 3% like what Robinhood charges for any one with at least $2K in Robinhood and $5/mo membership. If Elon is getting sub 1% interest rate. AND he gets to tax deduct that interest. It’s near nothing.
    • kjksf 5y ago
      Re 4: Musk doesn't avoid the tax, merely delays it. By the time he has to pay it he'll also have to pay tax on the accumulated interest. He'll pay the interest AND the tax on the principal AND the interest.
    • voldacar 5y ago
      With 4, the more significant factor is not tax avoidance, but the fact that selling 21B$ of shares in a short period would really tank the stock price. the negative effect of that would be more significant than capital gains tax
• ajross 5y ago
  > Why can't anyone do this? Everyone can do this. Just call your bank and get commitment from them to issue you a $40B loan! Those "commitment letters" are contracts. It's a known bank with known assets saying it's promised to issue a loan in the stated amount for the stated purpose. It's the same thing that happens when you make an offer on a house. You don't generally come to them with the money "out of pocket", you show them documentation from your bank that details your mortgage contract. But the mortgage doesn't actually exist yet because you don't own the home. It will execute at the same time as the purchase, generally through some kind of escrow process. Things aren't any different, fundamentally, even five orders of magnitudes higher.
• xwdv 5y ago
  You can. If you have a stock portfolio and your broker allows you to do margin loans you could just withdraw say $12k from your account as a loan without selling any shares and go buy a jet ski. But if you don’t have sufficient collateral your broker will just tell you to get fucked.
  • winterplace 5y ago
    Why contact you? Because you are insightful unlike most and there is agreement on some of the insights you wrote. Do you have an email address or a contact method? Old thread could not be replied to, probably because too many days past.
• ragebol 5y ago
  This is what I find funny about all those people shouting "No, Elon can't pay for taxes, it's all tied up in stocks!!1!" If you are stock-rich and you can buy stuff on the collateral for that: normal people can't really do that. Ordinary people have a much harder time buying more stuff than they have the cash for. Or at least on worse terms when they do take out a loan. Being rich is cheaper than being poor. Is it really so awful to change that?
  • alecbz 5y ago
    How would you change it? I imagine there’s a reason people feel more comfortable lending to Elon than to people with a smaller amount of assets, and that it’s not “lol fuck poor people”.
    • toomuchtodo 5y ago
      Tax the proceeds at loan origination (1099-whatever filed by whomever is providing the cash based on pledged assets). How you pay the loan back if the collateral declines in value is your problem (or the bank’s problem, depending on the amount in question). High level, it closes a financial engineering loophole (buy, borrow, die [1]). The taxable event is when you get liquid, and a loan is liquidity. The tax code requires a patch, that’s all. [1] https://youtu.be/8pBPZMUcsh0 https://youtu.be/8pBPZMUcsh0
      • jcheng 5y ago
        Would taxing the loan reset the cost basis, then? Or are you suggesting taxing the same gains twice (or more than twice if someone repeatedly takes out and pays back a loan against the same assets)? I agree buy, borrow, die is a problem but the “weird” feature of tax law that makes that possible is the step up in basis. (Getting rid of that has its own challenges I’m sure.)
        • bombcar 5y ago
          Given how fast heirs squander their wealth, it may not be worth the government fighting it too much, especially as the side-effects cause all sorts of howling (grandpa dies, dad inherits farm, has to sell it to pay the tax bill).
• masturbayeser 5y ago
  about a dozen answers have been posted here, each one missing the point people are conflating Musk's personal balance sheet with Twitter's. it's not clear to me whether any debt would be recourse to Musk—but in all likelihood, it wouldn't be. "recourse" is a term used to describe what collateralizes the loan. if the loan is recourse to Musk, he'll have to cover the cost if Twitter isn't spitting off enough cash flow to service the debt. if it's non-recourse, then the only collateral available to the creditors is Twitter and its assets (potentially subject to certain carve-outs). most rich people don't do recourse transactions as a risk mitigation measure. however, non-recourse debt is costlier because the universe of collateral available to the lender is slimmer why can't anyone do this? because Musk has been deemed a better sponsor / steward of capital than your average joe
• tuvan 5y ago
  Hah it's great. We had a national scandal along these lines. 1- Saudi company borrows $7B from Turkish banks to buy 55% of Turkey's largest internet and telephone provider. 2- Drive the provider into $4B debt (it was debt free when bought) 3- Pay the new holding company $9B in dividends 4- Don't pay the initial money borrowed to purchase the company. 5- Somehow borrow another $4B from Turkish banks to pay the new debt, and pocket that money as well. 6- Government creates a consortium of banks to bail the provider because its too big to fail. Outcome: Provider is in debt, banks lost all the money, banks needs to spend unknown amount to get the provider back into a functioning state.
  • throwaway2037 5y ago
    Yeah, sadly private equity does the same frequently. Sometimes, I cannot belive it is legal!
    • tmaly 5y ago
      Toys'R'Us comes to mind.
    • bombcar 5y ago
      What's the quote? If you owe the bank $1m the bank owns you, if you owe the bank $1 billion, you own the bank?
• jollybean 5y ago
  It means between himself, and a group of others, he has collected enough money to buy Twitter, as evidenced by the letters of intent. Those are legit. Banks don't sign notes without some intent. They can back out, but they are not meaningless. It's important so that the current shareholders and the board know that Musk's bid is legitimate, and not something he's just making up. In order for the banks and others to back him in this bid, he will have had to provide with with a lot of info. This could be a big PR move, but Musk will have had to hire very expensive bankers to actually go through this as if it were a real thing. "Why can't you do this?" Because Goldman and other Private Equity firms won't back you (well, assuming they won't). And they won't give you a letter to the board of Twitter saying they will.
  • bombcar 5y ago
    Yeah, the costs to do this are running in the millions, even if nothing ever happens. It was basically a foregone conclusion that Musk can do this, but each bank has to do a bunch of work inside to make sure they're not exposing themselves in ways they don't want to.
    • jollybean 5y ago
      Not a foregone conclusion. It's complicated. And banks definitely have to do their due diligence. If it was Buffet then it would be 'almost a foregone conclusion'. Not with musk. Musk has gained $10-30M in free publicity thus far. He's made the front pages of the news everywhere in the world. He can hardly lose here. And I'm not a Musk fanboy or anything.
      • bombcar 5y ago
        One difference is Buffet rarely if ever buys anything, Berkshire buys things. And I dare say Berkshire has everything ready to go. In this case Musk is buying using TSLA (and SpaceX?) shares as collateral, not having TSLA buy.
        • jollybean 5y ago
• legitster 5y ago
  It's very similar to buying a house - you don't get the mortgage first, you get a letter of pre-approval that says the bank is ready to give you a mortgage when you actually buy the thing.
  • bombcar 5y ago
    It's even technically more amusing (a pre-approval letter is just the bank saying eh probably we can do this; it's not even required) - the seller will say "We will sell if you have the money", the bank will say "we will give the money if the house is worth X and you have Y downpayment, you will say "I have Y down payment if the bank will give me the money" and the appraiser will say "I think the house is worth X+1-5% (it is always just above the amount needed)". Then you get a form of a financial standoff where each party checks that they're getting what they want, and you escrow/sign everything.
• tofuahdude 5y ago
  > Why can't anyone do this? The dude does own 200B + worth of publicly traded equities.
• TechBro8615 5y ago
  Not to be that guy, but anyone actually can do this with DeFi exchanges using a flash loan. You can borrow infinite capital with no collateral, as long as you can pay it back (plus fees) before the end of the current transaction.