Elon Musk will be the most indebted CEO in the US if the Twitter deal ends

Tesla chief Elon Musk speaks to the press as he arrives to review the construction site of the new Tesla Gigafactory near Berlin on September 3, 2020 near Gruenheide, Germany.

Maja Hitij | beautiful pictures

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

Two-third Elon Muskfinancial resources to make a deal worth $44 billion Twitter The private sector will have to pay out of their own pocket. It’s a deep pocket. He has a net worth of about $250 billion.

However, because his wealth is tied to Tesla shares, along with equity in SpaceX and The Boring Co.

According to his SEC filings, Musk’s Financial Plan including $13 billion in bank loans and $21 billion in cash, likely from the sale of Tesla stock. It also included a $12.5 billion margin loan, using his Tesla stock as collateral. Since banks require more money for high-beta stocks like Tesla, Musk will need to commit about $65 billion in Tesla stock, or about a quarter of his current total, to the fund. loan, according to the documents.

Even before the offer on Twitter, Musk pledged 88 million shares of the electric carmaker to margin loans, though it’s unclear how much cash he borrowed from the facility.

According to research firm Audit Analytics, Musk has more than $90 billion in shares pledged for loans. This total makes Musk the largest stock debtor by dollar among executives and directors, far ahead of second-placed Larry Ellison, OracleIts president and chief technology officer, $24 billion, according to ISS Corporate Solutions, an ESG data and analytics provider based in Rockville, Maryland.

Musk’s stock debt exceeds that of the entire stock market. His shares pledged before the Twitter deal accounted for more than a third of the $240 billion of all shares pledged in all companies listed on the NYSE and Nasdaq, according to Audit Analytics. With Twitter borrowing, that debt can grow even higher.

Of course, Musk has plenty of opportunities, 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, valued at more than $214 billion. The rest of his net worth comes from his more than 50% stake in SpaceX and his other business ventures.

He received another 25 million options as part of a plan this month as Tesla continues to meet performance goals. While Musk cannot sell newly received options for 5 years, he can borrow against them.

However, Musk’s 11-figure equity loan represents a whole new level of risk and leverage for the CEO. The risks were highlighted this week when Tesla’s stock price fell 12% on Tuesday, cutting more than $20 billion off Musk’s net worth. Shares of Tesla fell less than 1% on Thursday afternoon.

Musk’s bet also comes as other companies are sharply cutting back or restricting equity borrowing by executives. More than two-thirds of S&P 500 companies now have strict anti-mortgage policies that prohibit all executives and directors from pledging company stock for loans, according to data from ISS Corporate Solutions. Most other companies have anti-commit policies but allow exceptions or exemptions, like Oracle. Only 3% of the companies in the S&P are similar to Tesla and allow executives to pledge shares, according to the ISS.

The company’s concerns about excess stock leverage come after a number of big bangs in which executives have had to dump shares following margin calls from their lenders. . Green Mountain Coffee Roasters in 2012 fired its founder and president, Robert Stiller, and its chief director, William Davis, after 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 it called for his $100 million loan.

Jun Frank, chief executive officer of ICS Advisory, ISS Corporate Solutions, said companies are now more aware of the risks of operating pledges and face greater pressure from investors to limit operating capital lending.

“Pulling stock by executives is considered a significant corporate governance risk,” says Frank. “If an executive with a significantly committed ownership position fails to meet the margin call, that could lead to a sale of those shares, which could cause the stock price to plummet. “

In its SEC filing, Tesla claims that allowing executives and directors to borrow against their stock is key to the company’s compensation structure.

“The ability of our directors and executives to pledge Tesla stock for personal loans and investments related to their compensation is used by us,” Tesla said in its filing. equity awards and promote long-termism and a culture of ownership”. “Furthermore, providing these individuals with financial planning flexibility without having to rely on a stock sale aligns their interests with those of our stock holders. .”

The exact amount Musk borrowed against his stock remains a mystery. Tesla’s SEC filings show his commitment to 88 million shares, but not the amount of cash he actually borrowed against them. Had he mortgaged the shares in 2020 when Tesla stock was trading at $90, he would have borrowed about $2 billion by that time. Today, the borrowing power of that stock has increased tenfold, so he may have room to borrow $20 billion or more on top of the 88 million shares pledged. In that case, only about a third of his Tesla shares would be pledged after the Twitter deal.

However, if he increases the loan as Tesla stock rises, he may have to pledge more stock. Analysts say that if Musk has borrowed up to 88 million shares (which is highly unlikely) and he has to pledge an additional 60 million shares to fund the Twitter deal, more than 80% of Tesla’s shares are owned. His complete ownership will be pledged. Mortgage.

That would leave him with about $25 billion in undivided Tesla stock. If he also had to sell $21 billion of Tesla stock to pay the cash portion of the Twitter deal, as well as the accompanying capital gains taxes, then virtually all of the stock remains in his outright ownership. will be pledged.

According to SEC filings, Musk sells 4.4 million Tesla shares on Tuesday and Wednesday, raised about $3 billion in after-tax cash. He tweeted on Thursday “No more plans to sell TSLAs after today.” However, his plan for raising the rest of the $21 billion in cash needed for the deal remains unclear.

Either way, Musk will be putting a large portion of his Tesla fortune at risk, which could make for a bumpy ride ahead for Tesla shareholders.

Frank argues that equity borrowing ” exposes shareholders to significant stock price risk due to an executive’s individual funding decisions.”

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