By Matt Wirz
A wave of expected big media mergers would transform AT&T
Inc. and Comcast Corp. into the two most indebted companies in the
world, a standing that carries uncharted risks for investors in the
firms' bonds.
If both deals are completed -- AT&T has bought Time Warner
Inc. and Comcast hopes to purchase 21st Century Fox Inc. -- the
companies will carry a combined $350 billion of bonds and loans,
according to data from Dealogic and Moody's Investors Service. The
purchases are meant to provide additional income to help the
acquirers weather turmoil sweeping their industries. But if the
mergers falter, the record debt loads will give AT&T and
Comcast little margin for error, fund managers and credit ratings
analysts say.
"It's a very big number," said Mike Collins, a bond fund manager
at PGIM Fixed Income, which manages $329 billion of corporate debt
investments. "It has fixed-income investors a little nervous and
rightfully so."
The debt-fueled buyouts by AT&T and Comcast are extreme
examples of a decadelong surge in corporate borrowing that is
stoking investor anxieties about what will happen as the economy
slows and global interest rates rise. The ratio of debt to
corporate earnings, commonly called leverage, has also risen,
giving companies less financial cushion to absorb market
shocks.
Global corporate debt excluding financial institutions now
stands at $11 trillion, and the median leverage for such companies
rated investment grade has jumped 30% since the eve of the
financial crisis in 2007, according to Moody's research. Most
companies issue new loans and bonds to repay debt, and investors
are concerned about how companies will refinance their
record-breaking debt loads when capital markets experience their
next significant downturn.
Officials at AT&T and Comcast say the refinancing risk from
their postdeal debt would be minimal because they plan to quickly
repay much of the debt with cash generated from the combined
businesses. AT&T, for example, is expected to produce $8
billion to $10 billion of free cash flow -- or cash from operations
minus capital spending -- that could be applied to debt reduction,
analysts say. It is also common for telecom companies to carry high
debt because they invest heavily in their networks and their
customers provide them with reliable revenue.
Heavy borrowing by telecom and media companies fueled a surge of
defaults in the early part of the last decade by the likes of
WorldCom Inc. and Global Crossing, but fund managers said AT&T
and Comcast are different because they have vast, profitable
businesses to support their debt.
"These are high-quality companies, entrenched players with
stable businesses," says Ed Perks, portfolio manager of a $90
billion stock and bond fund at Franklin Templeton Investments. Mr.
Perks has steered clear of AT&T shares for several years out of
concern about its ability to adapt to the new competitive landscape
and is watching the Time Warner merger as he considers whether to
reinvest.
AT&T's and Comcast's other motives for borrowing are fairly
typical. Both companies are grappling with slowing growth and
increased competition caused by technological change, and they rely
heavily on stock dividends and repurchases to satisfy shareholders.
Comcast's offer for Fox at $35 a share puts it in a bidding war
with Walt Disney Co., which is bidding $29.54 a share.
Many corporations facing similar headwinds responded by raising
debt in recent years, an easy choice given low borrowing rates
created by ultraloose central bank policies across the globe.
Still, the scale of debt AT&T and Comcast would carry if
both purchases succeed is unprecedented, and debt investors are
scrambling to analyze the consequences.
"We are getting a lot of calls," says Allyn Arden a telecom and
cable analyst at S&P Global Ratings. S&P and Moody's cut
their ratings on AT&T bonds Friday to a level two notches above
the junk-debt category.
The cut, and an anticipated downgrade of Comcast, are expected
to lower the average ratings of most investment-grade corporate
bond portfolios because AT&T and Comcast are such large
components of the benchmark indexes tracked by investment firms.
Should AT&T complete its acquisition of Time Warner, it would
comprise at least 1.93% of the Bloomberg Barclays U.S. IG corporate
bond index compared with about 1.59% currently. A combination of
Comcast and Fox would make up at least 1.38% of the index, up from
Comcast's current 1.04% quotient.
Prices of AT&T and Comcast bonds have fallen as investors
demand more yield to hold the debt. Comcast bonds that mature in
2028 now yield 1.25 percentage points more than comparable Treasury
bonds, compared with 0.68 percentage point in February, while
comparable AT&T bonds yield 1.59 percentage points more than
Treasurys compared with 1.36 percentage points in February,
according to data form MarketAxess. Bond yields rise as prices
fall.
If the two companies repay debt used for the acquisitions as
planned, they could quickly return to their predeal credit ratings.
Conversely, if the forecast benefits of the mergers don't
materialize or if technological disruptions shrink revenue, ratings
firms could make further downgrades.
AT&T will have about $181 billion of debt because of the
Time Warner purchase but other liabilities, including operating
leases and postretirement obligations, amount to about $50 billion,
Mr. Arden says. As a result, S&P estimates the company's
postdeal leverage at about 3.5 times earnings before interest,
taxes, depreciation and amortization, or Ebitda. That is slightly
below the 3.75 times leverage that S&P views as typical for
comparable telecommunications companies rated triple-B-minus, the
lowest investment-grade rating.
AT&T calculates its leverage at 2.9 times Ebitda, but
doesn't include leases or postretirement obligations in the figure.
The telecommunications firm forecasts returning to 2.5 times within
four years, a person familiar with the company said.
Should additional rating cuts put the company on the edge of
junk-debt category, fund managers who are prohibited from holding
debt rated below investment grade might start to sell its bonds
pre-emptively.
"The risk is that everyone wants to get out of the debt at the
same time, " Mr. Collins said. "That's when it gets ugly." When oil
prices plummeted in 2015, for example, the debt of some energy
pipeline companies with low investment-grade credit ratings fell
15% in a matter of months.
Comcast is bidding $65 billion for Fox, the bulk of which will
be financed with debt, and would assume $20 billion of existing Fox
debt postmerger, according to a Moody's report. Leverage of the
combined company would be 4.25 times Ebitda, and Comcast would need
to reduce debt by $45 billion to return to a level of 2.75 times,
according to the report.
Gene Tannuzzo, portfolio manager of a $4.3 billion debt fund for
Columbia Threadneedle Investments, has halved his exposure to bonds
of telecommunications and media companies over the past year
because of their rising debt and headwinds facing the industries.
He has sold out of Comcast bonds entirely but would consider
purchasing debt backing the Fox purchase if it paid a high enough
yield, he said.
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
June 18, 2018 17:56 ET (21:56 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Walt Disney (NYSE:DIS)
Historical Stock Chart
From Mar 2024 to Apr 2024
Walt Disney (NYSE:DIS)
Historical Stock Chart
From Apr 2023 to Apr 2024