Verizon adds debt to fund M&A and spectrum auction

Verizon Communications returned to the US high-grade bond market on Tuesday with a US$12bn five-part deal –the fifth-largest bond for the year in the asset class – to fund its previously announced Tracfone Wireless acquisition and new spectrum licences.

Spreads on the five, 10, 20, 30 and 40-year maturities tightened by 20bp–25bp through price progression, leaving minimal concessions for investors, who stuffed order books to the tune of US$24bn.

Funds will be used in part to fund the US$3.25bn cash portion of its US$6.25bn Tracfone Wireless acquisition, which will add 21 million subscribers to make Verizon the number one player in the prepaid segment, according to a report from research firm Gimme Credit.

Verizon held US$9bn in cash on hand at the end of the third quarter, according to earnings announcements, but the company turned to the debt markets in order to keep excess cash on hand as a buffer against volatility resulting from the Covid-19 pandemic, Moody’s noted in a report.

The remaining funds will be used to pay off some US$1.9bn spent in a previous spectrum auction and to pre-fund what is expected to be a competitive December C-band spectrum auction where Verizon could spend more than US$10bn, according to a report from research firm CreditSights.

The new debt would increase Verizon’s adjusted leverage metrics, which stood at at 2.1x at the end of September, according to Moody’s, but ratings agencies are giving significant leeway for the company to return to its 1.75x to 2x unsecured debt adjusted Ebitda leverage range, CreditSights noted.

Indeed, S&P and Moody’s maintained their Baa1/BBB+ ratings on the company and kept a positive outlook. Market participants said they are optimistic ratings could be upgraded to match Fitch’s A– with a stable outlook, which was also affirmed on Tuesday.

“The billion-dollar question is how much Verizon is willing to spend without jeopardising its planned pathway toward an A- rating,” the CreditSights report stated.

“We believe the ratings agencies would not blink an eye at [Verizon] putting forth US$10bn to US$15bn … but, if history is any guide, auctions can be unpredictable, especially if other players are as aggressive as Verizon. In our view, the C-band spectrum is a must have for Verizon, so investors should consider the possibility that Verizon spends US$20bn or more.”

Strong demand
Demand for the bonds was most concentrated in the 20 and 40-year buckets, where the spread premium was highest, one broker-dealer said.

The five-part bond comprised a US$2bn five-year at Treasuries plus 40bp, a US$2.25bn 10-year at 85bp, a US$3bn 20-year at 115bp, a US$2.75bn 30-year at 115bp and a US$2bn 40-year at 130bp. Initial price thoughts were set at 60bp, 105bp, 135bp-140bp, 135bp and 150bp, respectively.

At the reoffer levels, the bonds offered little premium versus Verizon’s secondary curve where, for example, the company’s most recent non-green 10-year – the 3.15% March 2030 – was trading at a G-spread of 83.8bp earlier in the week, according to MarketAxess data.

Tuesday’s transaction was Verizon’s third offering in the primary market this year, following a US$1bn 10-year green bond from September and a US$3.5bn three-part bond from March, issued in an effort to shore up cash amid the pandemic.

Verizon also completed a US$5.6bn private exchange offer in October that retired short and long-term debt and replaced it with new 1.68% 2030s and 2.987% 2056s, according to a press release.

Bank of America, Citigroup, Goldman Sachs, JP Morgan and Wells Fargo were active bookrunners on Tuesday’s trade. IFR