Morgan Stanley Moves $5 Billion Debt Deal for Musk’s xAI

What happens when America’s wealthiest entrepreneur goes to war with a former ally just as Wall Street tries to pull off one of the biggest private debt sales in tech history? You get a deal hotter than the asphalt in Death Valley—and twice as slippery. Morgan Stanley is racing to close a $5 billion debt offering for Elon Musk’s artificial intelligence startup, xAI, while the billionaire’s very public feud with Donald Trump sends shockwaves through the markets. Once considered political soulmates, Musk and Trump are now throwing haymakers on social media, and it’s messing with more than just egos. How did we get here? What’s this $5B bet all about? Let’s break it down.

The Feud Heard Round Wall Street

Not long ago, Musk and Trump looked like a power duo in the making. Trump praised Musk as a “genius,” while Musk played political wingman behind the scenes. But last week, it all blew up on social media. Musk slammed Trump’s “Big Ugly Spending Bill,” hinted at undisclosed scandals, and aired frustrations over federal policy. Trump retaliated by calling Musk “CRAZY” and vowed to axe federal contracts with Musk’s companies—SpaceX, Tesla, and, crucially, xAI.

The market’s response? Brutal. Tesla’s stock nosedived, wiping out over $150 billion in market cap in a single day—the steepest one-day drop in its history. Musk later softened his tone, but the damage was already done. Investors began questioning the long-term viability of government-backed revenue streams across Musk’s empire.

From Twitter Debt Mess to xAI Hype

To understand why Wall Street’s suddenly skittish, let’s rewind. In 2022, Musk bought Twitter (now X) for $44 billion, fueled by $13 billion in bank debt, most of which was underwritten by Morgan Stanley. But as interest rates spiked and Musk revamped the platform, banks got stuck holding that debt for more than two years, unable to sell it off. Fast-forward to 2025: Musk merges xAI with X, forming XAI Holdings, and assigns it a staggering $94 billion valuation, up from $51 billion just months earlier. The combined firm is aiming high, building AI models for social platforms, autonomous vehicles, defense, and beyond. It’s the classic Musk play: swing for the fences, rewrite the rules.

Still, the financials are far from comforting. xAI posted a $341 million EBITDA loss in Q1 2025, with revenue figures still modest. Yet, insiders whisper about a future valuation between $120 billion and $200 billion, and a $20 billion equity raise is already in motion.

Morgan Stanley Ain’t About That Bag-Holding

Morgan Stanley is handling the $5 billion raise, offering a package of floating-rate term loans (700 bps over SOFR, priced at 97 cents on the dollar) and fixed-rate senior notes at an eye-watering 12%. But this time, the bank’s playing it safe. Unlike the Twitter deal, Morgan Stanley is not putting up its capital or guaranteeing the full raise. It’s a “best efforts” deal, meaning they’ll only place what the market is willing to buy. And with Trump threatening to cut off Musk’s federal lifelines, the market just got a whole lot more cautious. Initially, orders crossed $3.5 billion quickly. But as the Musk-Trump saga went viral, momentum stalled. By early this week, the tally hit $5 billion—the bare minimum—and the bank started tapping smaller lenders to fill the order book by the June 17 deadline

Investors Are Asking

Beyond politics, credit investors are digging into the numbers—and they’re not all pretty. xAI is burning cash. While growth potential is enormous, hard numbers are scarce. Collateral backing for the loan reportedly includes data centers and IP, but investors want more. They’re demanding tighter covenants, restrictions on payouts, and transparency around future debt issuance. One investor quipped: “It’s like betting on a Ferrari… that hasn’t built the engine yet.” Meanwhile, xAI's offering gives rare debt exposure to AI, a market mostly reserved for equity players. That’s a big draw. But recent shifts in AI funding have tightened standards. In 2023–24, the sector raked in one-third of all VC money, yet late-stage deals now favor companies with proven products, not just starry-eyed visions.

The AI Hype and the Risk

The timing of the deal coincides with a white-hot AI market. Venture investors poured nearly one-third of their capital into AI startups in 2023–2024, with mammoth raises like OpenAI’s $10B from Microsoft and Anthropic’s $4B from Amazon and Google. But credit investors haven’t had many opportunities to tap AI—until now. That’s part of the allure. xAI’s package offers rare fixed-income exposure to the booming AI sector, where equity valuations are off the charts.

Still, the bar is higher now. Investors are no longer dazzled by vague “AI” branding—they want product-market fit, revenue pipelines, and scalable IP. xAI needs to prove it can deliver. And let’s not forget: Musk’s empire was built on public dollars. Tesla, SpaceX, and SolarCity benefited from nearly $4.9 billion in U.S. government subsidies between 2010–2015. Musk himself acknowledged that Tesla once had just $9 million in the bank, with survival hinging on loans from friends. The current $5 billion raise shows how far he’s come—and how risky the bet still is.

What’s Next?

Rumors are swirling about a $300 million secondary share sale to give xAI employees liquidity, plus a $20 billion equity raise that could boost its valuation well above $120 billion. But first, the June 17 debt deadline looms. If Morgan Stanley pulls it off, it’ll prove that even in the middle of a political cage match, Wall Street still believes in Musk. If it flops? It could spook AI investors and make debt financing tougher for the entire sector. This deal is more than just a financing round—it’s a referendum on risk in the AI age. For CFOs, strategists, and financial pros tracking the space, it’s a front-row seat to a high-stakes poker game between politics, innovation, and capital markets. So yeah—it’s spicy out there. Stay sharp and stay subscribed.