With the announcement of their merger sending both company’s bond prices into decline, concerns about increased debt burden have increased
Source: The Wall Street Journal
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.