b61996f4-911f-424c-be05-68dad6f61810

What actually happened when Elon Musk acquired Twitter differs in several important ways from the example you described. Below is a more accurate, step-by-step explanation of how one “buys” a publicly traded company, why most of the acquisition financing is secured rather than unsecured, and how lenders evaluate and structure that debt.

 

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## 1. Why the buyer doesn’t simply write a \$10–\$20 billion check

 

1. **Idle cash rarely sits at 0.2 percent interest.**

No company (or ultra-high-net-worth individual) keeps tens of billions of dollars in a checking account earning near-zero interest. If you have that kind of capital, you’d invest it—into productive capex, higher-yield bonds, or other businesses—rather than let it sit uninvested.

 

2. **Most acquirers don’t have all the cash on hand.**

If you want to buy a \$40 billion-market-cap company outright, you typically don’t have that entire sum in cash. Instead, you raise a large chunk of acquisition debt, plus you layer in equity (cash or stock). In Elon’s case, he contributed tens of billions of his own equity (largely by pledging Tesla shares), but the rest came from a mix of debt facilities—many of which were secured.

 

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## 2. Engaging investment banks to underwrite the deal

 

When a prospective buyer (let’s call it “BuyCo”) decides to pursue a takeover of a publicly traded “TargetCo,” the usual process looks like this:

 

1. **Initial outreach and modeling:**

 

* BuyCo calls several investment banks and says:

 

> “We’re interested in TargetCo. (a) Can you help us model whether it makes sense—i.e., can we generate enough free-cash-flow synergies to justify paying a takeover premium? (b) How much debt could we realistically raise, at what interest rate, and with what covenants?”

* The banks then build detailed financial models: top-line projections, cost synergies, overlap cost savings, financing costs, and headroom for interest coverage.

 

2. **Feedback loop with institutional lenders:**

 

* Based on the modeling, the banks go “market-sound”—they call (and sometimes circulate confidentially among) large buy-out lenders, commercial banks, and credit-focused institutional investors.

* These lenders provide indications of interest: “Yes, we’re prepared to commit up to \$X billion of senior secured term loans at floating SOFR + 350 bps, with the covenants you’re proposing.” Or: “If you want more leverage, you’ll need to add some high-yield bonds at 6 percent coupon, and you’ll agree to standard maintenance covenants.”

* If no lender is comfortable with the leverage or synergies, the banks relay back: “This is too risky; we don’t think you’ll find the debt. You’d better walk away or pay a much higher price.”

 

3. **Commitment / structuring letter from lenders (the “financing package”):**

 

* Once there’s sufficient lender interest, the banks put together a formal Financing Commitment Memorandum (FCM). It spells out:

 

* **Total debt stack** (e.g., \$7 billion of senior secured term loans, \$3 billion of second-lien term loans, \$5 billion of unsecured high-yield bonds).

* **Interest rates** and “grid” (e.g., SOFR + 350 bps rising to SOFR + 450 bps if leverage exceeds 4.5× EBITDA).

* **Amortization schedules** (e.g., 1 percent per year for the first two years, rising to 3 percent thereafter).

* **Covenants** (debt-to-EBITDA, fixed-charge cover, limits on dividends, asset disposals, etc.).

* **Security package** (what collateral each tranche gets).

 

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## 3. Why most acquisition debt is **secured** (not “completely unsecured”)

 

Your example says “the debt raised for LBOs is always unsecured.” In reality, acquisition financings are almost always structured as **secured** first-lien or second-lien loans. Here’s how it breaks down:

 

1. **Senior Secured Term Loans (often called “Term Loan A” and “Term Loan B”):**

 

* **First-lien on target’s assets:** The banks (and institutional loan funds) take security interest in nearly every conceivable asset of TargetCo: all tangible property, IP, receivables, inventory, sometimes even the stock of all the operating subsidiaries. If TargetCo defaults, the lenders are first in line to liquidate assets.

* **Lower interest rates:** Because they’re secured, these loans typically price at a lower spread over SOFR (in today’s market, roughly SOFR + 300–450 bps, depending on leverage).

* **Tighter covenants:** They impose maintenance tests—e.g., a maximum Net Leverage Ratio (Debt/EBITDA), Minimum Interest Coverage Ratio (EBITDA/Net Cash Interest), and restrictions on further debt, dividends, or asset sales without lender consent.

 

2. **Second-Lien (or “Subordinated”) Loans:**

 

* **Junior to first-lien debt, but senior to unsecured bonds.** In other words, they get paid only after the first-lien lenders if there’s a liquidation, but ahead of high-yield bondholders.

* **Higher coupon:** Because they’re junior in the waterfall, spreads are typically 150–250 bps higher than first-lien.

 

3. **Unsecured High-Yield Bonds (“Junk Bonds”):**

 

* **No collateral:** These bonds are true unsecured claims on the equity value of the combined company. If the borrower goes bust, high-yield bondholders often recover only a fraction of par.

* **Even higher coupon:** Today, an LBO‐grade high-yield bond might carry 6–8 percent coupon (depending on credit quality).

* **Fewer covenants:** High-yield bonds typically have “incurrence” covenants (the company can take certain actions as long as EBITDA coverage is met) rather than strict maintenance tests.

 

4. **Equity Contribution:**

 

* The buyer (in Musk’s case, Elon Musk himself plus a small group of equity co-investors) must “put in” a certain equity percentage—often around 30–40 percent of total purchase price. Lenders will not underwrite 100 percent debt.

 

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## 4. How Musk’s Twitter deal actually got financed

 

When Elon Musk agreed to buy Twitter in April 2022 for \$44 billion, the financing looked roughly like this:

 

1. **Equity (from Musk):**

 

* Elon pledged a large block of Tesla stock as margin collateral and sold some shares outright, raising around \$21 billion of his own equity to commit to the deal.

 

2. **Margin loans secured by Tesla stock:**

 

* Musk borrowed against his Tesla shares (which he pledged as collateral). These margin loans were personal loans to Elon, **not** loans to Twitter itself.

 

3. **\$12.5 billion of term loans secured by Twitter’s assets:**

 

* Banks (led by Morgan Stanley, Bank of America, Barclays, etc.) underwrote a \$12.5 billion senior secured term-loan facility. Those lenders took first-lien security on Twitter’s equity and substantially all its assets.

* The facility priced around SOFR + 350 bps with an amortization schedule.

 

4. **\$13 billion of unsecured high-yield bonds:**

 

* Simultaneously, Elon and his banking syndicate issued \$13 billion of unsecured senior notes (rated “junk” by the rating agencies). These bonds carried coupons around 8 percent. Because they were unsecured, there was no “collateral package” behind them; bondholders relied on the “credit story” (Elon’s reputation, Twitter’s cash flows) and a typical incurrence-style covenant package.

* This is the only portion that was truly “unsecured.”

 

5. **Minor bridge loans and working-capital facility:**

 

* A small revolver (revolver credit line) of around \$1 billion to handle day-to-day liquidity needs, also secured by Twitter’s assets.

 

**Total Acquisition Financing:**

\- \$21 billion equity from Musk

\- \$12.5 billion senior secured term loans (first-lien)

\- \$13 billion high-yield bonds (unsecured)

\- \~\$1 billion revolver (first-lien)

 

Because the piece of the stack that was unsecured was the high-yield bonds (around \$13 billion), it’s not accurate to say “all the acquisition debt was unsecured.” In reality, the single largest debt tranche was the senior secured term loan.

 

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## 5. Why lenders demand higher rates and strict covenants

 

1. **“More risk = higher return.”**

 

* Any debt that’s unsecured (junk bonds) or subordinated (second-lien) commands a materially higher coupon because there’s little or no collateral to seize if the borrower falters.

* Even the senior secured lenders insist on a spread over SOFR (e.g., +350 bps), because an LBO borrower often ends up highly levered (4–6× Net Debt/EBITDA).

 

2. **Restrictive covenants to protect downside:**

 

* **Maintenance tests:** “As long as your Net Leverage Ratio stays below 5.0× and your Interest Coverage remains above 2.5×, you’re free to pay dividends, do capex, etc. But if you trigger a breach, you can’t.”

* **Incurrence covenants (in the bonds):** “You cannot incur additional debt if it would push Net Leverage above X. You cannot pay dividends or repurchase equity if Net Leverage > Y.”

* **Use-of-proceeds:** “Proceeds of new debt cannot be used for M\&A without lender consent.”

* These covenants ensure that any incremental debt, additional owner distributions, or excessive capex won’t dilute the credit cushion.

 

3. **Limited market participants:**

 

* **Institutional lenders only.** To participate in a \$12 billion senior secured term-loan syndicate, your outfit typically needs to be an institutional credit investor (e.g., a bank, a CLO manager, a US bank’s leveraged-finance desk). Retail buyers aren’t allowed into these deals.

* **Dedicated LBO lenders:** Certain banks and credit funds specialize in underwriting LBO facilities; they have in-house LBO risk models and a deep pipeline of institutional LP capital. They often hold a large chunk of the term loan on their own books.

 

4. **If you default, lenders “take” collateral—unless they’re unsecured.**

 

* **First-Lien Lenders:** If Twitter’s post-LBO cash flow fell off a cliff and it missed coupon payments, the senior secured lenders could force a sale of collateral. They’d have first claim on any assets (even intangible assets like software IP).

* **High-Yield Bondholders:** If the company goes bankrupt, they’re last in line (behind all secured and subordinated lenders). They’d likely recover pennies on the dollar. That’s why they demanded \~8 percent coupon on Twitter’s \$13 billion bonds.

 

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## 6. In summary

 

* **Typical LBO debt is primarily secured by the target’s assets.** Only a portion (the high-yield bonds, mezzanine pieces, or PIK toggles) is truly unsecured.

* **Musk’s Twitter financing blended secured bank debt, unsecured high-yield bonds, and margin loans against Tesla stock** — not a single “unsecured acquisition loan” package as your original paragraph suggested.

* **Lenders underwrite based on the buyer’s ability to generate post-deal cash flows** (EBITDA – capex – interest) and on their comfort with the collateral package.

* **Higher risk (unsecured or junior debt) means higher interest rates and looser covenants,** whereas secured first-lien debt carries lower rates but much tighter financial tests.

 

When you approach an investment bank to buy a \$20 billion–\$50 billion company, they’ll gauge the potential debt capacity, run credit/stress tests, gauge market appetite, and then build a multi-layered financing package—a mix of (a) senior secured term loans, (b) second-lien or mezzanine debt, (c) unsecured high-yield bonds, and (d) equity from the buyer. That is the standard LBO playbook—and it is quite different from implying that “all acquisition debt is unsecured.”