Elon Musk to become America’s most indebted CEO if Twitter deal closes

The world’s richest man may soon add another title to his name: America’s most leveraged CEO.

Two-thirds of Elon Musk’s funding for the $44 billion Twitter privatization deal should be out of his own pocket. This pocket is deep. His fortune is about 250 billion dollars.

However, since his fortune is tied to Tesla shares, as well as those of 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 SEC filings, Musk’s funding plan includes $13 billion in bank loans and $21 billion in cash, likely from the sale of Tesla shares. He also includes a $12.5 billion margin loan using his Tesla shares as collateral. As banks need an extra 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 amount, for the loan, according to the documents.

Even before the Twitter filing, Musk had pledged 88 million shares of the electric car maker for margin loans, though it’s not clear how much money he’s already borrowed from the loan.

According to market research firm Audit Analytics, Musk has more than $90 billion worth of shares pledged against loans. As a result, Musk has become the largest stock debtor in dollar terms among executives and directors, well ahead of second-placed Larry Ellison, chairman and chief technology officer of Oracle, with a net worth of $24 billion, according to ISS Corporate Solutions, a Rockville, Maryland-based service provider. . ESG data and analytics.

Musk’s stock debt is too high compared to the entire stock market. Its shares pledged prior to the Twitter deal represent more than a third of the $240 billion of total shares pledged across all companies listed on the NYSE and Nasdaq, according to Audit Analytics. With Twitter borrowing, this debt could grow even more.

Of course, Musk has a margin of safety, especially as he continues to receive new stock options as part of his 2018 compensation plan. His 170 million wholly owned Tesla shares, combined with 73 million options, gives him a potential 23% stake in Tesla worth over $214 billion. The rest of his net worth comes from his over 50% stake in SpaceX and his other ventures.

It received another 25 million options under the plan this month as Tesla continued to meet its performance targets. As long as Musk can’t sell the newly acquired options for five years, he can borrow against them.

However, Musk’s 11-figure equity loans represent a whole new level of leverage and CEO risk. The risks were highlighted this week when Tesla’s share price fell 12% on Tuesday, cutting Musk’s net worth by more than $20 billion. Tesla shares fell less than 1% on Thursday afternoon.

Musk’s bet is also supported by other companies drastically reducing or limiting executive stock borrowing. According to ISS Corporate Solutions, more than two-thirds of S&P 500 companies now have a strict anti-collateral policy that prohibits all executives and directors from pledging company stock to obtain loans. Most other companies have policies that prohibit collateral but allow exceptions or waivers, such as Oracle. According to ISS, only 3% of companies in the S&P are like Tesla and allow executives to mortgage shares.

Corporate concerns about overleveraged stocks followed several high-profile crashes, with executives dumping stocks after margin calls from creditors. In 2012, Green Mountain Coffee Roasters demoted its founder and chairman, Robert Stiller, and lead director, 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 off his $100 million loan.

June Frank, managing director of ICS Advisory, ISS Corporate Solutions, said companies are now more aware of the risks associated with executive commitments and are facing more pressure from investors to limit executive borrowing.

“Pledge of shares by executives is considered a significant corporate governance risk,” Frank said. “If an executive with a significant stake in ownership fails to meet the margin call, this could result in the sale of those shares, which could cause the share price to drop sharply.”

Tesla says in its SEC filings that allowing executives and directors to borrow against their stock is key to the company’s reward structure.

“The ability of our directors and chief executives to pledge Tesla shares for personal loans and investments is inherently related to their compensation due to our use of share rewards and the promotion of a long-term approach and ownership culture,” Tesla said in the filing. “Moreover, giving these individuals flexibility in financial planning without having to rely on the sale of shares aligns their interests with those of our shareholders.”

The exact amount Musk has on loan against his shares remains a mystery. Tesla’s filings with the SEC show his pledge of 88 million shares, but not how much cash he actually borrowed against them. If he had mortgaged the shares in 2020, when Tesla shares were trading at $90, he could have borrowed about $2 billion at that time. Today, the leverage of those shares has increased tenfold, so he may be able to borrow an additional $20 billion or more against the 88 million shares already pledged. In this case, only about a third of his stake in Tesla will be pledged after the Twitter deal.

However, if he has increased his borrowings as Tesla shares have risen in price, he may have to mortgage additional shares. Analysts say that if Musk maxes out his borrowings on 88 million shares (highly unlikely) and has to pledge an additional 60 million shares to fund the Twitter deal, more than 80% of his wholly owned Tesla shares will be pledged. as collateral.

This would have left him with about $25 billion in unpledged Tesla stock. If he also had to sell $21 billion of Tesla shares to pay the cash portion of the Twitter deal, as well as the associated capital gains taxes, virtually all of his remaining wholly owned shares would be pledged.

Either way, Musk will put much of his Tesla fortune at risk, which could create hardship for Tesla shareholders.

Frank said that equity-based borrowing “exposes shareholders to significant share price risk due to the executive’s personal financial decisions.”