Key Points
- Elon Musk’s xAI is closing a $5 billion debt deal led by Morgan Stanley.
- The company had to offer a steep 12% interest rate to attract investors due to the high risk.
- Investor interest was low, with the deal getting just enough orders to close, far below typical demand for similar sales.
- Many investors were hesitant due to the problems that followed Musk’s 2022 debt deal to acquire Twitter.
Elon Musk’s artificial intelligence company, xAI, is on track to secure a $5 billion debt package led by Morgan Stanley. But according to people familiar with the deal, investors weren’t exactly lining up to get a piece of it.
Despite the lukewarm interest, the deal is set to be finalized on Wednesday. To attract investors, xAI had to offer a very high interest rate of roughly 12% on its loans and bonds. For comparison, the average for similar high-yield (or “junk”) bonds is currently around 7.6%. The higher rate reflects the major risk involved; xAI is not yet profitable, and its debt is unrated, providing investors with limited insight into its financial health.
Many investors recalled the difficulties with Musk’s $44 billion acquisition of Twitter (now X) in 2022. In that deal, banks loaned him $13 billion but were then forced to hold onto that debt for two years because they couldn’t find buyers for it. Citing that history, several investors told Reuters they passed on this new xAI deal.
While the deal secured enough funding to close, investor interest was modest. It attracted orders for about 1.5 times the amount of debt available. In contrast, similar deals typically see demand that is 2.5 to 3 times higher.
This time, Morgan Stanley protected itself by handling the sale on a “best efforts” basis, meaning it didn’t guarantee the sale or put its capital at risk. This $5 billion debt deal is separate from a much larger effort by xAI to raise about $20 billion in equity from investors.
