Insights

In the United States, Elon Musk's artificial intelligence company, xAI, is reportedly on the verge of securing a significant $5 billion debt raise. Led by Morgan Stanley, this debt offering includes a combination of floating-rate term loans, fixed-rate loans, and secured bonds. The initial announcement about the debt offering was made on June 2. Despite this substantial sum, the initiative has faced lackluster interest from investors, particularly those focused on high-yield and leveraged loans. This limited engagement raises questions about the appeal of the offering in a competitive market. The structure of the debt offering comprises a floating-rate loan, which has an interest rate of 700 basis points above the Secured Overnight Financing Rate, while both the fixed-rate loan and the secured bonds are expected to yield approximately 12%. This projected yield is notably higher than the average yield-to-maturity for high-yield bonds, which, as of the latest reports, was around 7.6%. The demand for the debt was underwhelming, with investor orders reaching only about 1.5 times the amount of available debt. This contrasts with typical demand in similar transactions, which can range from 2.5 to 3 times the amount. The current debt raise is essential for xAI, which is simultaneously in discussions to potentially raise an additional $20 billion in equity. This would value the company at more than $120 billion, which indicates significant confidence in its long-term prospects despite current challenges. However, the simultaneous debt and equity raise raises concerns regarding xAI's financial health, especially given that the company has not yet received any credit rating. This lack of a rating delivers little clarity on its financial stability to potential investors, deepening the perceived risk associated with this debt offering. A key factor adding to the uncertainty surrounding the debt was the structure of the offering, which lacked guarantees from Morgan Stanley. Unlike Musk’s previous debt deal related to his acquisition of Twitter, Morgan Stanley has neither assured the sale amount nor committed capital to the transaction. The circumstances of this new offering, in conjunction with Musk's previous debt experiences, notably his expansive $44 billion funding for the Twitter acquisition in 2022, position investors to be cautious. Musk's track record with debt and the financial structure of xAI must be carefully evaluated as potential investors consider their options moving forward.