Elon Musk’s AI company, xAI, has closed a US$5 billion debt sale led by Morgan Stanley, although investor demand was reportedly modest.

Sources familiar with the transaction indicate that the debt package includes a floating-rate term loan, a fixed-rate loan, and secured bonds, with allocations made to investors on June 17, 2025.

The floating-rate loan carries an interest rate of 700 basis points above the Secured Overnight Financing Rate. Meanwhile, the fixed-rate loan and secured bonds offer yields of about 12%.

Interest in the offering was subdued, with orders for the debt totaling about 1.5 times the available amount. This is lower than the typical demand of 2.5 to 3 times seen for similar high-yield transactions.

This debt sale follows Musk’s previous financing challenges, including a US$13 billion loan related to his acquisition of social media platform X (formerly Twitter) in 2022.

In addition to the debt raise, xAI is reportedly in discussions to secure around US$20 billion in equity funding.

Neither xAI nor Morgan Stanley has commented on these developments.

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🔗 Source: Reuters

🧠 Food for thought

1️⃣ AI startups command premium valuations despite expensive debt financing

The xAI debt offering provides a striking example of how AI startups continue to attract massive investments despite paying substantially higher financing costs than established companies.

xAI’s 12% yield on secured notes is significantly higher than the 7.6% average for high-yield bonds, reflecting the premium investors demand for unrated, pre-profit companies1.

This aligns with broader 2025 AI funding trends, where venture capital firms invested over $180 billion into startups (a 27% increase from the previous year), with AI companies receiving substantial portions of this capital2.

Other AI startups demonstrate similar valuation momentum despite financing costs. For example, Mercor, an AI hiring platform, reached a $2 billion valuation, while Anysphere’s Cursor reportedly signed $100 million in contracts within a year of launch3.

This funding environment suggests investors are prioritizing potential AI market dominance over near-term profitability or traditional debt metrics when valuing these companies.

2️⃣ Venture debt grows as strategic financing tool despite higher rates

xAI’s $5 billion debt raise reflects the growing importance of venture debt as a strategic financing tool, even as interest rates remain elevated compared to historical norms.

The venture debt market is projected to reach $27.83 billion in 2025, highlighting the increasing demand for less dilutive financing options among startups seeking to extend their runway between equity rounds4.

This trend is particularly notable in capital-intensive sectors like AI, where companies use debt to optimize their capital structure while preserving ownership and control for founders and early investors5.

Musk’s approach with xAI mirrors a broader strategic shift where companies combine equity and debt financing. xAI is simultaneously pursuing a $20 billion equity raise while taking on this substantial debt2.

The willingness of companies like xAI to accept significantly higher interest rates (700 basis points over SOFR) demonstrates how founders are increasingly viewing debt as a worthwhile cost to maintain control and optionality in high-growth sectors4.

3️⃣ History of Twitter financing shadows Musk’s new debt ventures

Musk’s current debt raise for xAI is being evaluated through the lens of his previous Twitter financing, which created lasting concerns among potential investors.

The original article notes that some investors specifically declined to participate in the xAI debt offering due to Musk’s track record with Twitter, where banks loaned him $13 billion but couldn’t offload the debt for two years6.

This skepticism is rooted in Musk’s history of controversial financial maneuvers, including his infamous 2018 “funding secured” tweet about taking Tesla private, which was later ruled false by a judge and resulted in a $20 million SEC fine7.

Despite these concerns, Musk has consistently demonstrated an ability to raise massive financing. The Twitter acquisition ultimately closed at $44 billion, and now xAI is on track to secure its $5 billion debt package despite “tepid investor demand”6.

This suggests that while Musk’s financing approaches create investor wariness, his track record of building valuable companies (like Tesla and SpaceX) continues to give him significant leverage in capital markets.

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