RLPC: BellSouth bondholders grapple with changes

NEW YORK Tue Dec 4, 2012 9:41am EST

NEW YORK Dec 4 (Reuters) - AT&T is shocking BellSouth bond investors with news of an under-the-radar filing that transfers ownership of AT&T Mobility from BellSouth to its parent company, AT&T, sources told Thomson Reuters LPC.

When AT&T acquired BellSouth in 2006, AT&T also acquired BellSouth's 40 percent economic interest in AT&T Mobility LLC, formerly Cingular Wireless LLC. The remaining 60 percent of Mobility was owned by AT&T Inc.

With the transfer of ownership of BellSouth's 40 percent stake in AT&T Mobility, a significant portion of BellSouth assets will be stripped away from debt investors. BellSouth bondholders will no longer have AT&T Mobility assets supporting BellSouth bonds.

"I'm not happy about it," said one BellSouth investor. "It makes BellSouth bonds the same as any other OpCo."

In December 2010, AT&T filed an application under the Universal Licensing System, under the FCC, requesting pro forma transfer of control of AWACS Inc and its wireless licenses from New Southwestern Bell Mobile Systems Inc to AT&T Teleholdings Inc. The filing has been consummated, according to the ULS website.

"As part of an internal corporate restructuring that is planned for December 31, 2010, NSBMS will merge into AWACS, leaving Teleholdings as the direct parent of AWACS, which will be the surviving Entity," an attachment in the ULS application said. The ULS is the database and application filing system for most wireless radio services, according to the website.

Sources note that the ownership change allows AT&T to sell off BellSouth wireline assets, without concurrently any losing ownership of the wireless business previously under BellSouth's umbrella.

A spokesperson for AT&T declined to comment.

While analysts say the ownership transfer is allowed under the bond indenture, investors were blindsided by the lack of transparency surrounding the transfer, as the company had not previously indicated a change in ownership structure would take place, sources said.

Investors are surprised that the transfer is occurring, given that BellSouth bondholders will be subordinated, and will no longer have 100 percent draw to the wireless assets in terms of cash flows.

"They stripped away a big portion of the assets without letting anyone know," said one senior credit analyst. However, the effect on BellSouth bonds in terms of pricing is unclear.

"Insurance companies may not be looking to move the bonds at this point in the year," said one market strategist, adding that the bonds may also face liquidity concerns.

On November 30, AT&T completed an exchange offer in which $1.6 billion BellSouth bondholders tendered their bonds, and exchanged them for new AT&T senior notes. However, over $6.5 billion of debt will remain at BellSouth following the exchange offer. Only about $1 billion of this debt, the BellSouth 4.020 percent senior notes due 2021, carries an unconditional guarantee by AT&T. The remaining bonds are supported only by BellSouth assets.