Morgan Stanley, which led the deal, confirmed on Monday that xAI had closed a $5 billion debt financing round made up of secured notes and term loans. 

The deal, according to the bank, was oversubscribed and attracted major institutional investors across the globe.

Simultaneously, xAI closed a separate $5 billion strategic equity investment. Though the identities of the backers have not been disclosed, Bloomberg previously reported that the startup had been negotiating a $4.3 billion equity round with investors. 

That conversation is part of a larger funding goal, Musk’s team is reportedly looking to raise as much as $20 billion in equity that could push the company’s valuation beyond $120 billion. Some insiders are even betting on a $200 billion ceiling.

The funds are earmarked for aggressive expansion. A key priority is scaling up computing infrastructure through data centres tailored to handle vast AI workloads. 

The capital will also accelerate development of Grok, xAI’s core conversational platform integrated into X (formerly Twitter), and help the company move toward building its own custom chips, codenamed “Gigafab”, to reduce dependence on Nvidia’s high-demand GPUs.

Musk launched xAI in 2023 after parting ways with OpenAI, the company he co-founded. He has positioned xAI as a rival not just to OpenAI, but also to players like Google DeepMind and Anthropic. 

His approach is more unorthodox, Grok is marketed as a “rebellious” chatbot, an alternative to the more filtered responses seen in other models.

The debt raise and equity injection together represent one of the largest combined funding moves by a private tech startup in recent memory. 

It comes as global competition increases. OpenAI has a $51 billion partnership with Microsoft, while Amazon has poured $4 billion into Anthropic. These alliances are about access to compute power, chips, and distribution.

“The deal was oversubscribed and included prominent global debt investors,” Morgan Stanley stated in a post on X.

Musk has previously argued that building AGI, artificial general intelligence, requires vertical control over data, chips, energy, and distribution. This latest funding round gives xAI the firepower to attempt just that.

xAI has not issued a formal statement regarding the funding, and representatives did not respond to requests for comment at the time of filing. 

But then, we see that Musk is going all-in on building a scalable AI ecosystem, and investors, despite earlier doubts, are willing to put serious money behind it.

According to a source close to the matter, xAI is now offering a 12.5% fixed yield on $3 billion in bonds and an additional 12.5% on a $1 billion term loan. 

The same rate also applies to a separate $1 billion term loan B, though this one is being priced at a steep discount, just 96 cents on the dollar, and floats at 725 basis points above the Secured Overnight Financing Rate (SOFR). 

That’s a premium when compared to the average 7.6% yield for junk-rated bonds, based on the ICE BofA High Yield Index.

For a deal of this size, it’s rare to see such aggressive pricing without corresponding investor enthusiasm. The deadline for investor commitments, originally set for Tuesday, was pushed to Friday. Allocations are expected to follow a day later.

What’s behind the yield hike is the weak response. Reports reveal that the offering has drawn a lukewarm reception, with order books only 1.5 times oversubscribed. 

For comparison, similar high-yield offerings typically see demand exceed supply by at least 2.5 to 3 times. That gap sends a message, investors want more compensation for the risks they perceive.

xAI is an early-stage firm with no credit rating and limited public financials. It’s pushing to scale in an AI space already dominated by names like OpenAI, Anthropic, and Google DeepMind. 

That’s an expensive goal, and one that many see as high-risk, even with Musk’s name attached.

Complicating matters further, this debt raise isn’t backed with the same kind of financial support Musk enjoyed during his 2022 Twitter acquisition. 

Then, Morgan Stanley underwrote the deal. This time, the bank is taking a “best efforts” approach, meaning it’s under no obligation to sell the full amount or risk its own capital. That alone signals doubt about investor appetite.

The capital raise was first reported earlier this month with a very public online feud between Musk and former U.S. President Donald Trump. For some investors, that adds unnecessary political noise to an already complex financial proposition.

An analyst said, “When you’re offering 12.5% to raise money in today’s market and still struggling to close the books, that tells you everything you need to know.”

xAI is also said to be in talks for a much larger $20 billion equity raise, with valuation targets between $120 billion and $200 billion. But if this debt raise is any indication, the market may need more convincing before buying into those numbers.

Neither xAI nor Morgan Stanley has issued a comment, despite multiple requests.

Morgan Stanley, the lead banker for xAI, is currently looking to raise $5 billion through a debt offering. In meetings held with prospective investors willing to commit a minimum of $50 million, the bank revealed selected internal figures outlining xAI’s long-term financial targets and current losses.

According to information shared with those investors, xAI generated $52 million in gross revenue during Q1 but recorded a loss of $341 million before interest, taxes, depreciation and amortisation (EBITDA). 

Cash flow from operations was negative $220 million. The company had already spent $2.6 billion on capital expenditures and has plans to spend another $18 billion on data centre investments.

Even with the deep red figures, xAI expects a sharp turnaround over the next five years. Forecasts presented show the company hitting $2.7 billion in EBITDA by 2027 and climbing to $13.1 billion by 2029. 

On the revenue side, the company aims to close 2025 with $1 billion in gross income and projects $14 billion by the end of 2029.

These figures come as xAI simultaneously seeks a $113 billion valuation through a separate $300 million equity raise. The materialisation of this may depend on Musk’s current political entanglements.

The backdrop to all this is a public clash between Musk and Donald Trump. What began as a difference of opinion over government contracts escalated into a volatile exchange. Musk ultimately declared: “Trump should be impeached.”

This fallout has introduced complications for Morgan Stanley’s fundraising efforts. Some investors are reportedly wary of potential political backlash, especially considering Trump’s history of targeting institutions and individuals who challenge him. 

At this stage, it’s undefined how much the conflict has affected xAI’s debt sale, though signs of market nervousness are evident. For instance, the price of a loan tied to X, another Musk-owned company, reportedly dropped by 1.25 points on the same day Musk’s comments were made public.

Efforts are reportedly underway to defuse the stress. According to Politico, the White House has scheduled a private call between Musk and Trump in a bid to ease hostilities.

While investor interest in generative AI remains high, the financial model for many startups is still viewed as a long-term bet. Most require massive upfront capital to build data infrastructure and hire elite AI talent. xAI is no exception. 

Neither Morgan Stanley nor xAI have issued formal comments regarding the funding round or the political situation as of the time of filing this report.

This new financial boost included institutions from across nine banks including JPMorgan Chase, Citi, Goldman Sachs, Morgan Stanley, and Santander.

Aside the OpenAI liquidity boost, the credit line will also enable the company’s further expansion, as it comes a day after OpenAI’s valuation rose to $157 billion, becoming one of the most valuable private tech companies globally. 

The credit facility provides OpenAI with the financial flexibility to continue investing in infrastructure, talent acquisition, and research, while also addressing the growing demand for its generative AI technology, which gained global attention following the launch of ChatGPT in late 2022.

According to insiders, the credit line has the option to expand by an additional $2 billion, although it carries a relatively high interest rate of 6%, which could become a costly burden if the funds are accessed over time. 

Nevertheless, the arrangement allows OpenAI to maintain agility as it scales its operations, particularly in AI research and development, requiring high investment in computing capacity, such as Nvidia chips, which are important for running large-scale AI models.

The tech giant is forecast to generate $3.7 billion in revenue for 2024, though its operational costs are expected to result in losses of approximately $5 billion this year. Despite these losses, OpenAI is projecting substantial growth, with revenues expected to climb to $11.6 billion by next year.

The company has been undergoing a series of internal changes, including restructuring into a for-profit entity. Also, OpenAI CEO Sam Altman has denied rumours of receiving a large equity stake but acknowledged that the board has been considering restructuring options to better align with the company’s goals.

The funding round was led by Thrive Capital, with additional participation from Nvidia and Microsoft, OpenAI’s long-time strategic partner. This partnership with Microsoft is particularly noteworthy, given the role of Microsoft’s Azure cloud platform in supporting OpenAI’s AI infrastructure. 

Despite issues over high costs and leadership exits, OpenAI’s investors remain positive about the company’s growth in the AI sector.