xAI Targets $5 Billion Debt Financing Despite Tepid Demand
Elon Musk’s latest venture, xAI, is progressing toward securing $5 billion in debt financing led by Morgan Stanley, though investor enthusiasm has been noticeably restrained. The funding round, comprising a floating-rate term loan, a fixed-rate loan, and secured bonds, is set to be allocated to investors imminently.
Structure of the Debt Offering and Yields
The floating-rate loan is expected to carry an interest rate of 700 basis points above the Secured Overnight Financing Rate (SOFR), while the fixed-rate loan and secured notes are projected to yield about 12%. This is significantly above current averages, as the ICE BofA High Yield Index recently closed at a yield-to-maturity of 7.6%.
This elevated cost of debt reflects both xAI’s unproven financial track record and its unrated status, factors that present heightened risk for investors who lack comprehensive visibility into the company’s fiscal health.
Investor Caution and Comparisons to Musk’s Previous Deals
Several potential bond investors reportedly declined participation, citing concerns over xAI’s lack of profitability and absence of a credit rating. Skepticism is further fueled by Musk’s prior financing experience, notably the $44 billion acquisition of X (formerly Twitter) in 2022, where banks were burdened with holding $13 billion in loans on their balance sheets for two years due to limited market demand.
Although the current debt offering was fully subscribed, demand was modest, with order submissions reaching only about 1.5 times the amount of debt available—well below the typical 2.5 to 3 times oversubscription seen in similar high-yield bond deals.
’Best Efforts’ Transaction and Market Reception
Distinct from Musk’s previous debt raises, where banks often underwrote and committed capital, the xAI offering is being conducted on a best efforts basis, meaning Morgan Stanley is not guaranteeing the entire amount will be sold but will make its best attempt to place the debt with investors.
Historically, Musk’s debt financing around the Twitter deal saw banks profit by selling loans with little discount just months after certain political developments bolstered Musk’s influence.
Equity Talks Highlight Ambitious Growth Plans
In addition to debt fundraising, xAI is reportedly in discussions to secure approximately $20 billion in equity investment. Valuation estimates for the company vary widely, with figures ranging from over $120 billion to as high as $200 billion, reflecting significant investor interest in Musk’s vision to explore the fundamental nature of the universe through artificial intelligence.
Elon Musk’s xAI continues to navigate the complexities of raising capital amid cautious market sentiment, highlighting both the challenges and ambitions inherent in pioneering technologies.
