Bond Market Wary of AT&T, Time Warner Deal
October 24 2016 - 1:58PM
Dow Jones News
By Sam Goldfarb
Count bond investors among the skeptics of AT&T Inc.'s
proposed acquisition of Time Warner Inc.
The prices of both firms' bonds have declined since reports of
the deal began emerging late last week, sending up the so-called
spreads on the debt relative to ultrasafe U.S. Treasury
securities.
AT&T's 4.75% senior unsecured notes due 2046 traded early
Monday with a spread of 2.20 percentage points, up from 1.96
percentage point at the end of Thursday, according to MarketAxess.
The spread on Time Warner's 4.85% bonds due 2045 rose to 1.90
percentage points from 1.75 percentage points Thursday.
The increase reflects the skepticism about whether the deal,
which would sharply increase AT&T's debt load, makes sense
financially. Stock investors have expressed a separate concern,
centering on whether the deal will pass regulatory muster. Time
Warner shares were also recently down 2.3% to $87.44, far below
AT&T's offer of $107.50 a share, while shares of AT&T fell
1.5% to $36.93.
AT&T, already the largest nonfinancial corporate issuer of
dollar-denominated bonds, has said it plans to borrow as much as
$40 billion to finance the deal, raising the possibility of a
downgrade to its credit ratings. The telecom giant is currently
rated three notches above junk by Moody's Investors Service and
S&P Global Ratings. Time Warner is rated two notches above junk
by both firms.
AT&T has said it plans to reduce its leverage to near its
current levels within a year of the deal's closing.
Moody's on Monday put AT&T's ratings on review for a
downgrade but said a potential downgrade would likely be limited to
one notch. AT&T and Time Warner together could accumulate as
much as $10 billion in cash during the regulatory review process to
offset new debt, the ratings firm said.
Regardless of its ratings, many investors are wary of AT&T
adding so much debt when it is under intense competitive pressures,
said Lindsay Pacia, a senior analyst at the research firm
CreditSights.
The history of the telecom industry shows "things can change,
and they can change rapidly, and when you're highly levered you
will be more likely to be in trouble than your peers," she
said.
Still, not all investors are concerned. By acquiring a media
company, AT&T should be able to diversify its business while
generating substantial free cash flow, said Jason Abercrombie, a
credit analyst at Newfleet Asset Management, which has around $11.2
billion assets under management. The deal is a way for AT&T
executives to "hedge their bets" in an uncertain environment, he
added.
Immediately following the acquisition, AT&T's net debt
should rise to around 3 times its adjusted earnings, up from its
current level of around 2.3 times, according a report from
CreditSights analysts. Its annual free cash flow after taxes and
dividends should be around $10.4 billion, the analysts said.
AT&T has secured $40 billion in bridge loans that should
eventually be replaced by a mix of bank loans and unsecured bonds.
If the company sells close to $40 billion of bonds, it would be
among the largest corporate bond deals ever, ranking close behind
Verizon Communications Inc.'s $49 billion bond issuance in 2013 and
Anheuser-Busch InBev NV's $46 billion bond sale earlier this
year.
Before Verizon's 2013 deal, many analysts may have questioned
the feasibility of a bond issuance in the tens of billions of
dollars. But bond sales above $10 billion have recently become
almost routine, as companies take advantage of ultralow interest
rates and substantial demand from investors around the world for
higher-quality corporate debt.
(END) Dow Jones Newswires
October 24, 2016 13:43 ET (17:43 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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