The world’s richest person could soon add another title to his name: America’s most leveraged CEO.
Two thirds of Elon Musk‘s for the $44 billion deal to take Twitter private will have to come out of his own pocket. That pocket is deep. He has a net worth of around $250 billion.
However, because his wealth is tied to Tesla Musk, along with shares in SpaceX and The Boring Co., will have to sell millions of his shares and pledge millions more to raise the necessary cash.
According to its filings with the SEC, Musk’s financing plan includes $13 billion in bank loans and $21 billion in cash, likely from the sale of Tesla stock. It also includes a $12.5 billion margin loan, using his Tesla shares as collateral. Because banks require more protection for high-beta stocks like Tesla, Musk will need to commit about $65 billion of Tesla stock, or about a quarter of his current total, to the loan, according to the documents.
Even before Twitter’s offer, Musk had pledged 88 million shares of the electric carmaker for margin loans, though it’s unclear how much cash he’s already borrowed from the facility.
According to research firm Audit Analytics, Musk has more than $90 billion in shares pledged for loans. The total makes Musk the largest stock borrower in dollar terms among executives and directors, far surpassing Larry Ellison, who is in second place. Oracle‘s chairman and chief technology officer, with $24 billion, according to ISS Corporate Solutions, the Rockville, Maryland-based provider of ESG data and analytics.
Musk’s stock debt is huge relative to the entire stock market. Its pledged shares before the Twitter deal account for more than a third of the $240 billion of all pledged shares in all NYSE and Nasdaq-listed companies, according to Audit Analytics. With the Twitter loan, that debt could skyrocket even higher.
Of course, Musk has plenty of leeway, 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 in options, give him a potential stake in Tesla 23%, worth more than $214 billion. The rest of his net worth comes from his more than 50% stake in SpaceX and his other companies.
It received another 25 million options as part of the plan this month as Tesla continued to meet its performance targets. While Musk can’t sell the newly received options for five years, he can borrow against them.
However, Musk’s 11-figure stock loans represent a whole new level of CEO leverage and risk. The risks were highlighted this week when Tesla’s share price fell 12% on Tuesday, cutting more than $20 billion from Musk’s net worth. Tesla shares fell less than 1% on Thursday afternoon.
Musk’s gamble also comes as other companies are cutting back or drastically restricting stock lending by executives. More than two-thirds of S&P 500 companies now have strict anti-pledging policies, which prohibit all executives and directors from pledging company stock for loans, according to data from ISS Corporate Solutions. Most other companies have policies against pledging but give exceptions or exemptions, like Oracle. Only 3% of companies in the S&P are similar to Tesla and allow stock pledges by executives, according to ISS.
Corporate concerns about over-leveraging stocks follow several high-profile outbursts in which executives had to dump shares after margin calls from their lenders. Green Mountain Coffee Roasters in 2012 demoted its founder and president, Robert Stiller, and its 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 applied for his $100 million loan.
Jun Frank, managing director of ICS Advisory, ISS Corporate Solutions, said companies are now more aware of the risks of executive pledges and face increased pressure from investors to limit executive lending.
“Executive pledging of shares is considered a significant corporate governance risk,” Frank said. “If an executive with a significant compromised ownership position fails to meet the margin call, he could lead to the sale of those shares, which can trigger a sharp drop in the share price.”
In its SEC filings, Tesla asserts that allowing executives and directors to borrow against their stock is key to the company’s compensation structure.
“The ability of our directors and executive officers to pledge Tesla stock for personal loans and investments is inherently related to their compensation due to our use of stock awards and promotion of long-term ownership and a culture of ownership,” Tesla said in its statements. presentations. “In addition, giving these individuals flexibility in financial planning without having to rely on stock sales aligns their interests with those of our shareholders.”
The exact amount Musk has borrowed against his shares remains a mystery. Tesla’s SEC filings show his promise of 88 million shares, but not how much cash he actually borrowed against them. If he pledged the shares in 2020 when Tesla shares were trading at $90, he would have been able to borrow about $2 billion at that time. Today, the borrowing power of those shares has increased tenfold, so you could have room to borrow an additional $20 billion or more against the 88 million shares already pledged. In that case, he would only commit about a third of his stake in Tesla after the Twitter deal.
However, if you increased your debt as Tesla shares rose in value, you may have to pledge additional shares. Analysts say that if Musk has maxed out his loan on 88 million shares (which is highly unlikely) and has to pledge an additional 60 million shares to fund the Twitter deal, more than 80% of his shares wholly owned by Tesla would be compromised. As collateral.
That would leave him with around $25 billion of Tesla stock uncommitted. If he also has to sell $21 billion of Tesla stock to pay for the cash portion of the Twitter deal, as well as the accompanying capital gains taxes, virtually all of the remaining shares he wholly owns would be compromised.
Either way, Musk will be putting a large portion of his Tesla wealth at risk, which could make for a bumpy ride for Tesla shareholders.
Lending against shares, Frank said, “exposes shareholders to significant share price risk due to an executive’s personal financial decisions.”