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Elon Musk’s AI venture xAI was nearing a $5 billion debt financing deal to support its new data centers and chips. However, on Thursday, tensions escalated between Musk and US President Donald Trump, complicating matters.
Musk’s bankers at Morgan Stanley are now facing challenges as potential investors evaluate the implications of Musk’s deteriorating relationship with the president. Some believe this could also lead to higher borrowing costs.
Prior to their verbal spat, which saw Trump threatening to terminate Musk’s government contracts, over $4 billion in orders were placed for the deal.
Financing an AI firm associated with Trump’s “first buddy,” as Musk called himself, seemed to be a solid investment.
The strong interest had Morgan Stanley close to finalizing the debt agreement, attracting major investors like TPG.
Due to the high demand, Morgan Stanley had even contemplated securing lower financing rates than initially proposed.
Now, however, those rates are uncertain, with some investors speculating that xAI may need to offer a higher rate to secure funding.
The extensive borrowing plan is expected to consist of both fixed and floating-interest rate loans, along with a corporate bond, and insiders have indicated that the $5 billion fundraising is still on track.
Earlier in the week, bankers discussed lowering the bond and fixed-rate loan interest from 12% to 11.5%, while the floating-rate loan was projected to have a rate 7 percentage points above the standard floating interest rate.
“This situation complicates things,” remarked one individual reviewing the deal. “Government endorsement is crucial for the entire ecosystem, not just this aspect. It will inevitably alter people’s willingness to support it.”
As Musk and Trump exchanged barbs on social media, xAI’s management met with investors to share their projections for the company’s business and growth potential.
Morgan Stanley aimed the debt offering at large investment firms capable of placing orders of at least $100 million, targeting many of the same investors who supported loans for xAI’s sister company, the social media platform X, earlier this year.
Reflecting the impact of the ongoing dispute, the value of X’s debt dropped to about 96 cents on the dollar, down from over 99 cents just a day prior.
Even before the altercation, Morgan Stanley had encountered some pushback from investors. Lenders expressed concerns regarding the deal’s documentation and requested that xAI strengthen several traditional investor safeguards, including limits on new debt and cash payouts to investors.
Others questioned the intellectual property backing the loan and the collateral’s value, which is also secured by the data centers xAI is constructing.
Some investors have indicated they might withdraw from the deal if their concerns aren’t addressed, potentially reducing how much xAI can raise or increasing its interest expenses. Morgan Stanley has set a target deadline of June 17 to finalize these terms.
xAI has not responded to requests for comment. Both Morgan Stanley and TPG have also declined to comment.
Investors conducting due diligence noted that xAI is currently operating at a loss and its revenue remains modest. However, their investment reasoning partly relies on the company’s equity valuation and the belief that xAI will begin securing lucrative corporate contracts for its technology.
“This could be one of the leading products in commercial AI,” one lender commented. “While OpenAI has a strong consumer edge, xAI can become a significant player in the commercial sector, potentially valuing the business at much more than $15 to $20 billion.”
The Financial Times reported recently that xAI is initiating a $300 million share sale, which would value the company at $113 billion.
Nevertheless, some creditors have voiced frustration over the limited information provided thus far.
Sources familiar with the negotiations mentioned that Morgan Stanley is strictly regulating access to the data room and communications with management. Additionally, one informant noted that the slide presentation xAI provided before Thursday’s investor meeting was notably brief, comprising around ten slides or fewer.
“It seemed very insubstantial,” expressed one observer referencing the xAI data room. “It felt more like a fantasy than a reality.”
“It’s just an idea at this point,” another person said regarding the presentation. “They are currently spending money without making any.”
Further reporting by Robert Smith in London
