Amid Tesla Inc.’s TSLA precipitous stock drop, reports of it triggering a margin call on the loan availed by Elon Musk to fund the Twitter acquisition began doing the rounds. The rumors, however, have been proven to be ill-founded.
What Happened: It all started when Barron’s report said on Thursday Musk was margin called for his Twitter loan and the news quickly spread around. In response to the story, Tesla bull and Future Fund’s Gary Black tweeted that Musk had never taken a margin loan when he bought Twitter.
See Also: How Did Elon Musk Make His Money
“The final financing was $31B equity and $13B LBO debt. So there couldn’t have been a margin call,” Black said.
Barron’s subsequently carried a correction with a note that Musk considered, but didn’t use a $12.5 billion margin loan for his Twitter buy.
In a face-saving move, the amended report from Barron said if Musk had gone ahead with a tentative initial financing agreement with the bankers, he would have had to cough up more cash or provide more collateral. Explaining it further, the report noted that under the originally drafted agreement, the initial loan-value ratio for a $12.5 billion loan was 20%. This would mean the loan had to be backed by stock collateral of $62.5 billion.
The initial margin call would have happened when the loan-to-value ratio fell below 35%, the report said. Tesla stock would have had to drop about 43% for the ratio to fall below the 35% threshold, it added.
Given that Tesla stock was down much more than 35% since the closing of the Twitter acquisition, Musk would have had to face a margin call last week, the report said.
Musk’s Foresight Saves The Day? The visionary he is, Musk may have an inkling of what was to come. As Black said, he finally went in for $13 billion in debt and the remaining $31 billion as an equity component.
A Bloomberg report recently raised the possibility of Twitter financiers, led by Morgan Stanely, considering replacing the high-interest-bearing part of the debt package with margin loans. About $3 billion of the $13 billion was an unsecured loan carrying an interest rate of 11.75%.
Musk himself recently warned about avoiding margin loans. In an All-In Podcast, Musk said he would advise people against having margin debt in a volatile market and suggested keeping cash.
“You can get some pretty extreme things happening in a down market,” he added.
Following an extended decline, Tesla shares rebounded in the past couple of sessions.
Price Action: Tesla stock closed Thursday’s session up 8.08%, at $121.82, according to Benzinga Pro data.
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