Elon Musk will be America’s most indebted CEO if Twitter deal goes through
The richest person in the world may soon add another title to his name – America’s most indebted CEO.
Two-thirds of Elon Musk’s funding for the $44 billion deal to privatize Twitter will have to come out of his own pocket. This pocket is deep. He has a net worth of around $250 billion.
Yet because his wealth is tied to shares of Tesla, as well as equity in his SpaceX and The Boring Co., Musk will have to sell millions of his shares and pledge millions more to raise the necessary cash.
According to his filings with the SEC, Musk’s funding plan includes $13 billion in bank loans and $21 billion in cash, likely from the sale of Tesla stock. It also includes a $12.5 billion margin loan, using its Tesla stock as collateral. Because banks need more of a cushion for high-beta stocks like Tesla, Musk will have to pledge about $65 billion in Tesla stock, or about a quarter of his current total, for the loan, according to the documents.
Even before Twitter’s offer, Musk had pledged 88 million shares of the electric carmaker for margin loans, though it’s unclear how much money he’s already borrowed from the facility.
According to research firm Audit Analytics, Musk has more than $90 billion in equity pledged for loans. The total makes Musk the largest equity debtor by dollar among executives and directors, far surpassing Larry Ellison, Oracle’s president and chief technology officer, with $24 billion, according to ISS Corporate Solutions. the supplier from Rockville, Maryland. ESG data and analysis.
Musk’s equity debt is outsized relative to the broader stock market. Its shares pledged before the deal on Twitter account for more than a third of the $240 billion of all shares pledged in all NYSE and Nasdaq-listed companies, according to Audit Analytics. With Twitter borrowing, that debt could climb even further.
Of course, Musk has plenty of cushion, especially as he continues to receive new stock options as part of his 2018 compensation plan. His 170 million fully owned Tesla shares, combined with 73 million options give him a potential 23% stake in Tesla, worth more than $214 billion. The rest of his net worth comes from his more than 50% stake in SpaceX and its other businesses.
He received an additional 25 million options under the plan this month as Tesla continued to meet performance targets. Although Musk cannot sell the newly received options for five years, he can borrow against them.
Yet Musk’s 11-figure stock loans represent a whole new level of CEO leverage and risk. The risks were highlighted this week as Tesla’s share price fell 12% on Tuesday, cutting more than $20 billion from Musk’s net worth. Tesla shares were down less than 1% on Thursday afternoon.
Musk’s bet also comes as other companies cut or sharply restrict executive stock borrowing. More than two-thirds of S&P 500 companies now have strict anti-collateralization policies, prohibiting all officers and directors from pledging company stock for loans, according to data from ISS Corporate Solutions. Most other companies have anti-engagement policies but grant exceptions or waivers, like Oracle. According to ISS, only 3% of companies in the S&P are similar to Tesla and allow the pledging of shares by executives.
Corporate concerns about excessive leverage in stocks follow several high-profile blowouts in which executives had to dump stocks after margin calls from their lenders. In 2012, Green Mountain Coffee Roasters demoted its founder and president, Robert Stiller, and its senior manager, William Davis, after the two men were forced to sell to meet margin calls. In 2015, Valeant CEO Michael Pearson was forced to sell shares held by Goldman Sachs as collateral when he called on his $100 million loan.
Jun Frank, managing director at ICS Advisory, ISS Corporate Solutions, said companies are now more aware of the risks of executive pledging and face increased pressure from investors to limit executive borrowing. .
“Executive pledging of shares is considered a significant risk to corporate governance,” Frank said. “If an executive with a large pledged ownership position fails to meet the margin call, it could lead to the sale of those shares, which may trigger a sharp decline in the share price.”
In its filings with the SEC, Tesla says allowing executives and directors to borrow against their stock is key to the company’s compensation structure.
“The ability of our directors and officers to pledge Tesla stock for personal loans and investments is intrinsically tied to their compensation due to our use of stock awards and the promotion of long-term and a culture of ownership,” Tesla said in its filings. “Furthermore, providing these individuals with flexibility in financial planning without having to rely on the sale of stock aligns their interests with those of our shareholders.”
The exact amount Musk borrowed against his shares remains a mystery. Tesla’s SEC filings show its promise of 88 million shares, but not the amount of money it actually borrowed against them. If he had pledged the shares in 2020 when Tesla stock was trading at $90, he could have borrowed about $2 billion at the time. Today, the borrowing power of those shares has increased tenfold, so he could have the ability to borrow an additional $20 billion or more of the 88 million shares already pledged. In this case, only about a third of his stake in Tesla would be pledged after the Twitter deal.
Still, if he has increased his borrowing as the value of Tesla shares has risen, he may need to pledge additional shares. Analysts say that if Musk has maxed out his borrowing on 88 million shares (which is highly unlikely) and has to pledge an additional 60 million shares to fund the Twitter deal, more than 80% of his shares wholly owned by Tesla would be pledged. as a guarantee.
That would leave him with about $25 billion in unpledged Tesla stock. If he also had to sell $21 billion worth of Tesla stock to pay for the cash portion of the Twitter deal, plus the accompanying capital gains taxes, nearly all of his remaining stock in full ownership would be pledged.
Either way, Musk will put much of his Tesla wealth at risk, which could create a bumpy ride for Tesla shareholders.
Borrowing against stocks, Frank said, “exposes shareholders to significant stock market risk because of an executive’s personal financing decisions.”
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