(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Richard Beales
NEW YORK, Sept 11 (Reuters Breakingviews) - Verizon Communications (VZ.N) is herding the investing sheep in spectacular fashion. Bond buyers piled into the U.S. telecom operator’s record $49 billion debt sale. Pricing aside, a big part of the lure is the creation of a supersized, super-liquid benchmark. It’s an offer that just can’t be refused.
That helps explain why Verizon was able to scrap any issuance in euros and pounds, instead selling more than anticipated in dollars, including $15 billion of 30-year bonds and $11 billion with a 10-year term. The company’s underwriters also made the deal appealing by offering yields higher than on Verizon’s existing bonds and above average for the BBB+ rating Standard & Poor’s gives the borrower. The 10-year notes, for example, will provide investors with interest of about 5.2 percent a year.
In addition to small discounts on the final sale prices the generous coupons have already shrunk in the gray market, pushing up the value of the new bonds and leaving a cushion against the effects of rising interest rates. Verizon’s speed to market – only a week after announcing its $130 billion agreement to buy the 45 percent stake in Verizon Wireless it doesn’t already own from Vodafone – surely owes something to this trend, too. Getting the deal away quickly also takes heat off JPMorgan (JPM.N) which, along with Morgan Stanley (MS.N), Bank of America (BAC.N) and Barclays (BARC.L), provided a mammoth $61 billion bridge loan.
There are still risks, though. Verizon Wireless may be a familiar business to its parent company, but Verizon is more than doubling its $50 billion debt load at the end of June, against an equity market value of about $130 billion. The new debt will cost about $2.5 billion a year in interest, roughly doubling that annual expense. While the company reported $30 billion of EBITDA last year, it will nonetheless now have less room to increase investment or other outlays.
Verizon’s deal is almost three times the size of the previous non-bank record holder, Apple’s (AAPL.O) $17 billion offering earlier this year – on which investors are nursing losses. On such a scale, new bonds become their own readily accessible market. More than 3,000 orders from at least 800 investors totaling over $100 billion, according to IFR, attest to the breadth of interest. Verizon’s bond yields may be tempting, but in truth any asset manager trying to match an index or its competitors must own them.
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- Verizon Communications launched a $49 billion eight-tranche bond on Sept. 11 that will partly finance the $130 billion buyout of its wireless operations from Vodafone (VOD.L), setting a new record for the largest ever corporate bond.
- The final size was at the top end of the $45-$49 billion range that market sources expected following demand in excess of $100 billion. That eliminated the need for the company to tap the euro and sterling market, as originally planned, IFR reported.
- The bond issue will partly refinance a $61 billion one-year bridge loan Verizon secured to fund the Verizon Wireless acquisition. The rest of the bridge will be replaced with about $12 billion of three and five-year term loans.
- The deal eclipses Apple’s $17 billion offering in April, currently the largest corporate bond issue on record.
- Reuters: Verizon launches record-breaking $49bn bond [ID:nL2N0H70RC]
Dialing for dollars [ID:nL2N0GV1NQ]
Cool bonds [ID:nL2N0DD1XQ]
- For previous columns by the author, Reuters customers can click on [BEALES/]
(Editing by Jeffrey Goldfarb and Emily Plucinak)
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