Elon Musk’s AI startup Xai has increased its yield on its $5 billion debt offering, showing a cautious response from investors. The update follows a report from Bloomberg earlier this week, with Xai looking to raise $4.3 billion in stock.
The revised terms, including a 12.5% yield on $3 billion bonds, suggest that the city is adapting to market conditions as it works to close one of the sector’s biggest private debt hikes this year.
A source familiar with the transaction said Xai previously offered 12% yields but has increased the rate to 12.5% on both bonds and a billion-dollar loan.
“Xai said it offered to pay a 12.5% yield on the $3 billion bond. It said it asked for anonymity to disclose private information. Previously, sources told Reuters that the company provided a 12% yield,” Reuters reported.
Another $1 billion floating term loan, known as Term Loan B, is priced at 725 basis points over the SOFR benchmark and offers a 96 cent discount in dollars. This is rising from the first pitch of 700 basis points.
In comparison, junk rated bonds show an average yield of around 7.6% according to the Ice Bofa High-Hight Index.
The deadline for investors’ commitments, originally set on Tuesday, has been extended until Friday. Allocation is expected to occur one day after closing. If the transaction closes on Friday, investors will find an allocation on Monday.
Larger yields may be a response to softer demand than expected. Typically, higher returns are used to attract investors when there is uncertainty or hesitation about a company’s risk profile or long-term performance. In the case of Xai, it could be tied to its short operation history or the background of a wider macro.
Reuters previously reported that the service had not sparked strong interest from traditional high-yield or leveraged drone buyers. And unlike Musk’s Twitter acquisition agreement (where a bank like Morgan Stanley guarantees some of the funding), this is a “best effort” transaction. That means Morgan Stanley isn’t on the hook if he can’t sell all his debts, according to those familiar with the terms.
Launched by Musk in July 2023, Zai has fulfilled its mission to explore the deepest mysteries of the universe. The Xai team includes top talent from companies such as Google Deepmind, Openai, Microsoft Research, and Tesla. This drives advances in Deepmind’s Alphacode and Openai’s GPT-3.5 and GPT-4. Musk appears to position Xai as a terrifying player in the AI space, each aiming to compete with giants such as Openai, Google and Anthropic, known for their flagship AI models.
Musk co-founded Openai in 2015, but left the board in 2018, and has since expressed skepticism about the direction of big technology in AI, citing concerns about potential censorship. Musk’s recent AI vision includes “truth-focused” AI designed to counter products such as Google’s Bard and Microsoft’s Bing AI by exploring basic truths about the universe.
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