Elon Musk’s AI startup xAI boosts bond yields to 12.5% in $5B debt raise amid weak investor demand

Elon Musk’s AI startup xAI is increasing the yield on its $5 billion debt offering, signaling a cautious response from investors, Reuters reported on Friday. The update follows a Bloomberg report earlier this week that xAI is also seeking to raise $4.3 billion in equity, a sign the company is pursuing aggressive funding on multiple fronts.

The revised terms, including a 12.5% yield on $3 billion in bonds, suggest the company is adjusting to market conditions as it works to close one of the largest private debt raises in the sector this year.

A source familiar with the deal said xAI had previously offered a 12% yield but bumped the rate to 12.5% on both the bonds and a $1 billion fixed-term loan.

“xAi is offering to pay 12.5% yield on $3 billion in bonds, said the source who asked for anonymity to disclose non-public information. Previously, sources told Reuters the company had offered a 12% yield,” Reuters reported.

A separate $1 billion floating-rate term loan — known as a Term Loan B — is now expected to be priced at 725 basis points over the SOFR benchmark, with a discount of 96 cents on the dollar. That’s up from the initial pitch of 700 basis points.

Junk-rated bonds, by comparison, are averaging around 7.6% yields, according to the ICE BofA High Yield Index — putting xAI’s offer in much higher-risk territory.

The deadline for investor commitments, which was initially set for Tuesday, has been extended to Friday. Allocations are expected to happen one business day after closing. If the deal wraps up Friday, investors will find out their allocations Monday.

The bigger yield may be a response to softer-than-expected demand. Higher returns are typically used to attract investors when there’s uncertainty or hesitation about a company’s risk profile or long-term performance. In xAI’s case, that could be tied to its short operating history or the broader macro backdrop.

Reuters previously reported that the offering hadn’t sparked strong interest from traditional high-yield or leveraged loan buyers. And unlike Musk’s Twitter acquisition deal — where banks like Morgan Stanley guaranteed parts of the financing — this is a “best efforts” transaction. That means Morgan Stanley isn’t on the hook if they can’t sell all the debt, according to someone familiar with the terms.

Launched by Musk in July 2023, xAI set out with a mission to explore the universe’s deepest mysteries. The xAI team includes top talent from companies like Google DeepMind, OpenAI, Microsoft Research, and Tesla—people who have driven advancements such as DeepMind’s AlphaCode and OpenAI’s GPT-3.5 and GPT-4. Musk appears to be positioning xAI as a formidable player in the AI space, aiming to compete with giants like OpenAI, Google, and Anthropic, each known for their flagship AI models.

Although Musk co-founded OpenAI in 2015, he left the board in 2018 and has since voiced skepticism about Big Tech’s direction in AI, citing concerns about potential censorship. Musk’s recent AI vision includes a “truth-focused” AI, designed to counter offerings like Google’s Bard and Microsoft’s Bing AI by exploring fundamental truths about the universe.