T AT&T Inc

Risk premiums on debt issued by AT&T Inc. (T) and Deutsche Telekom AG (DTE.XE, DTEGY) swung in opposite directions Monday, after AT&T agreed to acquire T-Mobile USA from Deutsche Telekom for $39 billion.

The cost of protecting AT&T bonds rose 14.5% on concern about the company's future leverage, according to data provider Markit, while the cost to protect Deutsche Telekom bonds fell by the same amount.

AT&T said it would fund $25 billion of the purchase price in cash and new debt, and the remaining $14 billion in common stock. It also has an 18-month commitment for a one-year, $20 billion bridge loan underwritten by J.P. Morgan.

AT&T is unlikely to draw on the bridge loan--at least not for long--as it would be a costly source of financing. At the same time, AT&T may find it challenging to raise such a large amount in the bond markets ahead of the scheduled deal closing.

"The most likely avenue for companies of AT&T's stature is to use the bank loan as a bridge financing--only for a short period--and then go to the public markets," said Gerry Granovsky, senior credit officer at Moody's Investors Service.

"The expectation is that AT&T does a massive bond deal instead of actually taking out such a large loan," said Adam Cohen, founder of Covenant Review, an independent credit research firm.

A spokeswoman for AT&T had no comment on the company's long-term financing plans. As of Dec. 31, AT&T's long-term debt was just under $59 billion, and it will not be assuming any Deutsche Telekom or T-Mobile debt as part of the deal.

In return for selling T-Mobile, Deutsche Telekom will get up to 8% of AT&T stock--or less if the financing mix changes--giving it sufficient proceeds to reduce its debt load by EUR13 billion ($18.5 billion), or 31%.

The cost of protecting $10 million of AT&T bonds over five years using credit default swaps rose to $87,000 a year from $76,000 as of late Friday, said Markit, while the cost to protect the same amount of Deutsche Telekom bonds fell to EUR71,000 from EUR83,000 Friday.

Credit default swaps on the two companies generally trade in line; the last time AT&T spreads were noticeably wider than those of Deutsche Telekom was in October 2010, according to Otis Casey, director in credit research at Markit.

Moody's put AT&T's credit ratings, now at A2 stable, on review for downgrade, citing potential complications from the takeover. Granovsky said in an interview it could mean "reduced financial flexibility" for AT&T, and even unforeseen asset sales as regulators scrutinize the deal.

"Knowing what we know now, it's just a slightly weaker credit--although four or five years down the line, it could have a strong profile," he said. "We have a feeling [regulators] may put mandates on what inducements AT&T can offer to customers."

AT&T bonds bearing a 6.550% coupon and maturing in February 2039 fell to 104.558 cents on the dollar for a yield of 6.204%, down from 110.155 cents on the dollar and a yield of 5.81% Friday, according to MarketAxess data. Bond yields and prices move in opposite directions.

Meanwhile, Deutsche Telekom International Finance BV 8.750% bonds due June 2030 rose to 131.48 cents on the dollar and a yield of 5.973% versus 5.987% Friday.

The transaction, which is expected to be complete in 2012, is the biggest global telecom deal since AT&T's $89.4 billion acquisition of BellSouth Corp. in December 2006, and the biggest bridge loan since 2000, according to Thomson Reuters data.

-By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com

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