Several large US and international banks would lose $500m or more if they proceed with obligations to fund Elon Musk's $44bn takeover of Twitter, according to a report on Saturday.
The banks, led by Morgan Stanley and six others, including Barclays and Bank of America, committed six months ago to raise $13bn in debt to finance Musk's purchase - an agreement that does not hinge on whether they are able to sell the debt on to investors.
According to Bloomberg calculations published on Saturday, the banks' losses would collectively amount "to $500m or more if the debt were to be sold now".
Higher interest rates tied to efforts to bring down record inflation have led to a deterioration in the credit markets, with returns on risky junk bonds and leveraged loans surging. When the Musk-Twitter deal was financed in April, banks agreed to terms with lower yields than the market would now accept, leading to potential write-downs.
About $400m of the $500m in losses that the banks are estimated to have on the Twitter debt are in unsecured, high interest bonds, and they exclude fees the banks would typically earn on the transaction.
"I think that those banks would like to get out of it, I think the deal makes less sense for them now, and that the debt will be harder to syndicate to investors," Howard Fischer, a Moses Singler law firm partner, told the outlet.
In a surprise turnaround last week, Musk abandoned his three-month effort to terminate the Twitter deal through a US court in Delaware, citing the large number of fake accounts on Twitter. By some estimates, 20% of Twitter users are fake.
The billionaire boss of Tesla and SpaceX also cancelled negotiations to shave $10bn off the agreed $44bn price tag (Twitter shares have traded as much as $20 below the $54 a share agreed in April) and said he would accept the original terms of the deal.
Musk told the Financial Times on Saturday that his interest in the company has never been primarily financial.
"I'm not doing Twitter for the money. It's not like I'm trying to buy some yacht and I can't afford it. I don't own any boats. But I think it's important that people have a maximally trusted and inclusive means of exchanging ideas and that it should be as trusted and transparent as possible."
Twitter, however, did not immediately drop the lawsuit it is pursuing in order to force Musk into compliance.
"There is no need for an expedited trial to order defendants to do what they are already doing," Musk's attorneys wrote in a filing. "Yet, Twitter will not take yes for an answer. Astonishingly they have insisted on proceeding with this litigation, recklessly putting the deal at risk and gambling with their stockholders interests."
Twitter said the attempt to halt the litigation was "an invitation to further mischief and delay".
On Thursday, the judge presiding over the case, Kathaleen McCormick, granted Musk's request to delay a trial scheduled for 17 October. Musk's attorney said they could get the deal could done by 28 October "pending receipt of the proceeds of the debt financing".
But some warn that there are few ways for the banks to get out of providing financing, for both legal and reputational reasons, even if that means booking substantial losses. "Generally it would be hard to have deals go forward if they were contingent on bank financing and that bank financing was not rock solid," Fischer told the outlet.
But if the deal does not close later this month, McCormick has said that she would schedule a trial for November.
