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Elon Musk’s artificial intelligence company xAI was closing in on a $5bn debt financing package to fund new data centres and chips to power its business. Then on Thursday the world’s wealthiest man torpedoed his relationship with US President Donald Trump.
Musk’s bankers at Morgan Stanley must now contend with this new complication as would-be investors try to assess the fallout from the dramatic unravelling of Musk’s ties to the president, according to people briefed on the matter. The debt could be more expensive too, they added.
Before the two men launched into a war of words — which included Trump’s threat to rip up Musk’s government contracts — investors had placed more than $4bn of orders for the deal.
Lending money to an AI venture belonging to the president’s “first buddy”, as Musk referred to himself, also looked like a solid bet.
The enthusiasm was drawing Morgan Stanley close to the finish line on the debt raising, with big name investors such as TPG in tow.
The interest was so high that Morgan Stanley had floated the prospect that xAI might lock in cheaper financing than they had initially pitched.
But that pricing is now up in the air, with some investors wagering xAI may have to pay up to lock in the financing.
The multibillion-dollar borrowing package is still expected to be split between fixed- and floating-interest rate loans as well as a corporate bond, and a person briefed on the matter said the $5bn capital raising was still on track.
Bankers had earlier in the week debated reducing the coupon on the bonds and fixed-rate loans from 12 per cent to 11.5 per cent, while the floating-rate loan was expected to price with an interest rate 7 percentage points above the benchmark floating interest rate.
“This makes it even harder,” one person conducting due diligence on the deal said of Musk’s fallout with Trump. “You need government support for that whole ecosystem, not just for this. It has to have some impact on . . . people’s comfort level with supporting it.”
xAI management met investors on Thursday as the two men locked heads on social media, sharing projections for the company’s business and its growth prospects.
Morgan Stanley had pitched the debt to large credit shops who could place orders of at least $100mn and had targeted many of the same investors who had agreed to buy loans from xAI’s sister company, social media site X, earlier this year, several people said.
In a sign of the effect the kerfuffle was having on Musk’s businesses, prices on X’s debt slid to about 96 cents on the dollar from more than 99 cents a day earlier.
Even before the spat, Morgan Stanley had faced some investor pushback. Lenders had raised concerns with the documents that underpin the deal, requesting that xAI buttress a number of traditional safeguards that are offered to investors. Those include the amount of incremental debt xAI can take on as well how much cash it can pay out to its investors.
Others had raised questions about the intellectual property that secures the loan package and the value of the collateral. The debt is also secured by data centres xAI is building.
Some investors had signalled they would walk away from the deal if their concerns were not met, which could diminish how much money xAI is able to raise or increase its interest burden. Morgan Stanley is working towards a deadline of June 17 to hammer out these terms.
xAI did not immediately respond to a request for comment. Morgan Stanley and TPG declined to comment.
Investors who have been conducting due diligence on the debt said xAI was lossmaking and revenues were small. But their investment thesis is in part underpinned by the company’s equity valuation and their belief xAI will begin to sell lucrative corporate contracts to use its technology.
“It’s a product that will probably be one of the winners of commercial AI,” one lender said. “On the consumer side OpenAI has a big lead but on the commercial side they can be a material player and that will be worth a lot more than $15bn to $20bn.”
The Financial Times reported on Monday that xAI was launching a $300mn share sale that would value the group at $113bn.
Nonetheless, some creditors have complained about the limited data that has been shared so far.
People familiar with the deal said that Morgan Stanley was keeping a tight yoke on access to the data room and on calls with management. One person added that a slide deck xAI provided ahead of a management presentation to investors on Thursday had roughly 10 or fewer slides.
“It was really pretty fugazi and I say that as a lover of the xAI data room,” the person said, using a slang term for phoney.
“It’s all fantasy, it’s an idea,” a second person said of the presentation. “They are spending money, not making money yet.”
Additional reporting by Robert Smith in London
https://www.ft.com/content/57d5b733-9060-44fe-94c3-41a600ebb079
