NEW YORK (Reuters) -Morgan Stanley is marketing a $5 billion package of bonds and two loans on behalf of billionaire Elon Musk-owned xAI, at the same time as a falling out between the world's richest man and the U.S. president plays out in public, sources familiar with the matter told Reuters.

As of last week, the bank started discussing a floating-rate term loan B at 97 cents on the dollar with a variable interest rate of 700 basis points (bps) over the SOFR benchmark rate, one person familiar with the matter said. 

It is offering a second option, loan and bonds at a fixed rate of 12%, the person familiar added. The terms are preliminary and will depend on investor demand, according to the source. Morgan Stanley held a meeting with investors last week in which some financials of the company were shared.

Morgan Stanley is taking a different approach in marketing the $5 billion debt for Musk's xAi from previous transactions, sources familiar with the matter told Reuters.

Morgan Stanley will not guarantee the issue volume or commit its own capital to the deal, the sources said. The 'best efforts' transaction, which means the size of the debt will depend on investor interest, is not an uncommon practice but shows banks are probably being more prudent lending in an uncertain macro environment.

The people spoke on condition of anonymity because the discussions with investors are not public. Morgan Stanley declined to comment, while xAI did not immediately respond to a request for comment.

Banks were also likely choosing this approach to avoid putting themselves in a similar spot to when they committed to give $13 billion of debt to Musk to finance his $44 billion acquisition of X in 2022 and could not get out of that position for two years.

The X financing is considered one of the boldest bets by seven banks led by Morgan Stanley who committed $13 billion in debt to the $44 billion acquisition by Elon Musk in October 2022. Soon after the deal to buy Twitter, as X was called at the time, the Federal Reserve began raising U.S. interest rates and Musk started restructuring the company.

Banks typically sell such loans to investors soon after the deal is done, but in the case of X, they were stuck holding it for over two years. 

They could only dispose of that debt earlier this year capitalizing on X's improved operating performance over the previous two quarters as traffic on the platform rose before and after the U.S. presidential elections. 

Musk's role in U.S. President Donald Trump's return to office and public displays of his closeness to the most powerful position in the world also boosted interest for the debt from investors jockeying for some influential link to a new regime, as well as a surge in investor interest for exposure to artificial intelligence companies.

Apart from selling debt, xAI has also been in talks to raise about $20 billion in equity funding, according to people familiar with the matter. Two of the people added the deal would value the company at more than $120 billion, while the other two people said figures as high as $200 billion had been discussed.

Musk initially explored raising funds in parallel with a merger of xAI and social media platform X, but that plan did not move forward, two of the people said.

What has changed in just the space of a few months is Musk's political sway over Trump after an acrimonious schism erupted between the two. That has cast a cloud over the future of the businesses owned by the world's richest man, which though private could be hurt if the federal government chooses to cancel contracts or grants to them. 

It has also heightened the risk of demand being reduced for any money that will be raised or investors asking for a higher risk premium on the new debt.