Morgan Stanley is offering a US$5 billion package of bonds and loans for Elon Musk’s AI company, xAI, according to sources.

The package includes a floating-rate term loan B priced at 97 cents on the dollar, with a variable interest rate of 700 basis points over SOFR.

Another option includes loans and bonds at a fixed 12% interest rate.

The deal uses a “best efforts” approach, meaning the final amount will depend on investor demand.

Morgan Stanley will not commit its own capital or guarantee the issue volume, signaling caution amid economic uncertainty.

This marks a shift from the bank’s role in Musk’s US$44 billion acquisition of X (formerly Twitter) in 2022.

Meanwhile, xAI is also in talks to raise US$20 billion in equity funding, potentially valuing the company between US$120 billion and US$200 billion.

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🔗 Source: Reuters

🧠 Food for thought

1️⃣ Musk’s financing patterns show evolution from government dependence to private market reliance

This xAI debt offering represents a significant shift in Musk’s historical funding approach, which previously relied heavily on government support.

Between 2010-2015, Musk’s early empire was fueled by approximately $4.9 billion in government subsidies across Tesla, SpaceX, and SolarCity, including a crucial $465 million Department of Energy loan for Tesla 1.

During Tesla’s precarious early days in 2010, Musk personally “ran out of cash” and relied on loans from friends while the company was down to its last $9 million, demonstrating how close his ventures came to collapse without external support 2.

The current private market financing for xAI reflects Musk’s transition from government dependency to leveraging his established track record and private investor relationships, though the higher interest rates (12% fixed) reflect both current market conditions and perceived risk.

This evolution mirrors the trajectory of his earlier ventures, which initially required substantial public support before achieving independent commercial viability.

2️⃣ Interest rate environment significantly impacts tech debt pricing and structure

The 12% fixed rate and 700 basis points over SOFR for the xAI offering directly reflects both the current interest rate environment and risk assessment for AI ventures.

This pricing stands in stark contrast to the favorable terms Musk secured during the near-zero interest rate era, such as Tesla’s early Department of Energy loan, highlighting how monetary policy shapes funding accessibility 3.

For context, the tech sector is particularly sensitive to interest rate fluctuations, with higher rates typically reducing tech valuations and tightening funding conditions as investors shift toward safer assets with guaranteed returns 4.

Morgan Stanley’s “best efforts” approach (rather than guaranteeing the issue) represents standard industry caution during uncertain macro environments, especially for ventures without established revenue streams.

The structure of this deal demonstrates how even billionaire-backed ventures must adjust to prevailing market conditions, with debt pricing reflecting both company-specific risk and broader economic factors.

3️⃣ AI funding landscape increasingly favors established players with clear revenue paths

The xAI debt offering occurs amid an evolving AI investment landscape where investors are becoming more selective, requiring stronger fundamentals rather than speculative growth.

In 2023-2024, AI startups captured nearly one-third of all venture capital investments despite overall tech funding declines, with major deals including OpenAI’s $10 billion from Microsoft and Anthropic’s $4 billion round 5.

However, investors have shifted toward prioritizing AI companies with clearly defined products, scalable technology, and real-world value over generic AI claims, suggesting xAI needs to demonstrate concrete applications to succeed 6.

The valuation gap between major AI stocks and the broader market has reached potentially unsustainable levels, creating pressure for new AI ventures to justify their valuations through concrete business models and revenue paths 7.

This fundraising attempt also comes as regulatory concerns around AI are growing globally, adding another layer of complexity and risk that investors must consider when pricing debt for companies like xAI.

Recent xAI developments

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