Verizon Communications Inc. (VZ:US) rewarded investors with a profit of about $2.54 billion for agreeing to buy the record $49 billion of bonds it sold yesterday as the price of the securities surged.
The company’s $15 billion of 30-year debentures, the biggest portion of the eight-part deal, traded at 107.26 cents on the dollar at 4:20 p.m. in New York, up from an issue price of 99.883 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The $11 billion of 10-year notes rose 3.906 cents to 103.582 cents.
Demand soared after the New York-based phone company offered yields that were higher than market rates to raise interest in an offering that was about the size of all the outstanding obligations of the Slovak Republic amid the worst selloff in the bond market since 2008. The 10-year securities were priced to yield 225 basis points more than similar maturity Treasuries, or 47 basis points wider than bonds with similar maturities and ratings, according to data compiled by Bloomberg.
“Two billion seems like a big number to leave on the table,” Peter Tchir, the founder of hedge-fund adviser TF Market Advisors, said in a telephone interview. “Maybe Verizon was just so happy to get the deal done. That’s a pretty big price move for any size issue.”
The initial spread on the 10-year bonds, ranked Baa1 at Moody’s Investors Service and BBB+ by Standard & Poor’s, exceeds the 178 basis-point average spread the day before Verizon’s sale for bonds due in seven to 10 years with a Bloomberg composite rating of BBB.
“New issue concessions that are meaningful are something we haven’t seen for some time,” said Bonnie Baha, the head of global developed credit at Los Angeles-based DoubleLine Capital LP. “There’s a cushion built in there for a little bit of a rise in rates.”
Bob Varettoni, a Verizon spokesman, declined to comment on the sale and the secondary trading levels. The sale is almost triple the previous record of $17 billion that Apple Inc. issued in April, Bloomberg data show.
Verizon’s sale was managed by Barclays Plc, Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley, the company said in regulatory filings. The underwriters were paid $265.3 million in fees, according to a regulatory filing.
The five biggest holders (VZ:US) of Verizon debt based on regulatory filings are Vanguard Group Inc., BlackRock Inc. (BLK:US), Prudential Financial Inc., MetLife Inc. and Capital Research & Management Co., Bloomberg data show. The company’s existing bonds lost 3.95 percent in the week leading up to the offering.
Proceeds from the offering, along with $14 billion of loans, will help finance Verizon’s buyout of partner Vodafone Group Plc. (VOD)’s 45 percent stake in the largest and most profitable U.S. wireless carrier, Verizon Wireless.
“The new issue concession is significant,” Dorian Garay, a New York-based money manager at ING Investment Management, which oversees about $230 billion, said yesterday in a telephone interview. “They’re trying to lock in interest rates now because of all the concern about rising rates, and at the same time lock up most of the funding for the acquisition, so they have to pay up for sure.”
Independent bond research firm CreditSights Inc. issued a report yesterday reiterating its “outperform” recommendation on Verizon’s bonds, saying the yield spreads offered were “much wider” than for previously issued debt of the company and those sold by rival AT&T Inc. (T:US)
Dallas-based AT&T sold $1.5 billion of 10-year debentures in December at a spread of 105 basis points, according to data compiled by Bloomberg. That’s 120 basis points, or 1.2 percentage point, lower than the 225 basis-point spread Verizon offered for similar-maturity debt.
Verizon had its credit grades cut to Baa1 by Moody’s and BBB+ at S&P on Sept. 2, with both firms citing heightened leverage from the acquisition. The purchase may boost Verizon’s ratio of debt to cash flow to 3.4 from 3, according to S&P, which it said will contribute to a “significant” financial risk profile.
“We believe almost all excess cash flow will be used for de-levering in the next few years,” analysts at CreditSights said in their report. The firm noted that Verizon officers said on a call with investors and analysts after the Verizon Wireless purchase announcement that it may be able to get back to its previous credit rating of A3 as its leverage shrinks to about 2 times.
As the Federal Reserve has signaled it may begin tapering its $85 billion in monthly bond purchases that have bolstered credit markets, the Bank of America Merrill Lynch U.S. Corporate Index has lost 4.12 percent since year-end. That’s poised for the worst performance since a 6.82 percent decline in 2008 as Lehman Brothers Holdings Inc.’s collapse ushered in the worst financial crisis since the Great Depression.
Yields on the debt increased to 3.59 percent yesterday from a record-low 2.65 percent on May 2, index data show.
The second-biggest U.S. telephone carrier (VZ:US) issued fixed-rate debt with maturities ranging from three to 30 years as well as two portions of floating-rate securities.
Besides the 5.15 percent notes due in 2023 and the 6.55 percent bonds due in 2043, Verizon also sold $4.25 billion of 2.5 percent, three-year fixed-rate notes to yield 165 basis points more than similar-maturity Treasuries; $4.75 billion of 3.65 percent, five-year debt at a spread of 190 basis points; $4 billion of 4.5 percent, seven-year securities yielding 215 basis points more than benchmarks; and $6 billion of 20-year, 6.4 percent notes paying 250 basis points, Bloomberg data show. The 30-year bonds pay a spread of at 265.
Verizon sold $2.25 billion of three-year floating-rate notes at a spread of 153 basis points more than the three-month London interbank offered rate and $1.75 billion of five-year floaters at 175 basis points above Libor, Bloomberg data show.
Libor, the rate at which banks say they can borrow from each other, was set today at 25 basis points.
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