AT&T preps major funding in 2013

Fri Dec 21, 2012 10:47am EST

Dec 21 (IFR) - AT&T figures high on the list of likely active debt issuers in 2013, and in recent weeks it has shown creativity with its funding forays.

The US telecoms giant has raised US$6.6bn since announcing last month that it would increase capital spending, and is expected to raise at least US$17bn more over the next three years to fund business expansion.

AT&T plans to accelerate investment in networks to strengthen its position in both the wireless and fixed-line markets. The plan - Project Velocity IP (VIP) - aims at driving an increase in revenues from existing and new products.

AT&T expects capital spending to be about US$22bn for each of the next three years before returning to pre-VIP levels. This would be an estimated US$3bn increase annually from the US$19bn spent by the company in 2012.

Market players estimate the plan will require at least US$17bn from debt capital markets to fund the spending increase and debt maturities.

AT&T said its net-debt-to-EBITDA ratio could move from 1.42 at the end of third-quarter 2012, up to the 1.8 range. According to a report by Morningstar, at the end of the third quarter, net debt is estimated to be about 1.5 times EBITDA.

"We stated at our November 7 analyst conference that we expect our debt ratio to increase up to the 1.8 range over the next three years," said an AT&T spokesman.

"That level is a ceiling, not a target, and we can't speculate about the amounts we would plan to raise. We have been clear that we expect the ratio to trend back down in 2015. Our long-term goal is to maintain credit ratings of A or higher."

GO GET SOME CASH

AT&T has already begun reviving currency and funding options.

Since the November announcement, the company has raised US$2.6bn equivalent in two euro-denominated trades and about US$4bn in US-dollar trades. The dollar trades offered AT&T liquidity in standard three, five and 10-year tenors, while the euros enabled the company to get competitive pricing on off-the-run tenors like eight and 20 years.

The first post-announcement deal came on November 28, when it priced its first euro-denominated deal in more than four years. Initial guidance on the A2/A-/A rated issuer's EUR1bn eight-year bond, which extends its curve beyond the April 2015, was set at mid-swaps plus 60bp-65bp, and later fixed at the tight end of the range. The yield on the eight-year was 2.28% in US dollar fixed terms, or a spread of 65bp over November 2022 Treasuries.

Orders had exceeded EUR1.4bn by the time books closed via Bank of America Merrill Lynch, Barclays and RBS. The new issue concession was considered flat to secondaries.

AT&T tapped the euro market again on December 11 with a 20-year new issue, the longest benchmark euro corporate deal in more than two years, coming via BofA Merrill and Barclays. The 3.55% EUR1bn 2032 trade, which attracted EUR2bn of orders, was considered a key step forward for the nascent market in long-end Euros.

The bonds were announced with guidance of 140bp-145bp over mid-swaps, and priced at the tight end after being increased in size from an initial EUR500m. The bonds traded around 5bp through reoffer on the immediate trading day. The yield worked to about 4.15% in US dollar terms or a spread of 135bp over 30-year Treasuries.

The book size was over EUR1.75bn and it comprised investors from Germany (36%), UK (31%), and France (14%) among others.

The euro trades showed AT&T was being opportunistic with its debt issuance, tapping into tenors that were hardly tapped by US issuers at home. In the US high-grade market in 2012, the only eight-year trade was a US$200m reopening of a 2020 deal by CSN Resources. There have been three deals in the 20-year space.

AT&T's 20-year trade was rare because the average maturity of a benchmark high-grade corporate bond in sterling this year was 15.4 years, compared to just 7.7 years in euros. The last benchmark euro 20-year deal was more than two years ago - Deutsche Telekom in October 2010.

"Our ability to issue euro-denominated debt under these terms indicates the interest outside the US in AT&T and our ability to issue debt in currencies other than US dollars," said an AT&T spokesman.

At the same time, AT&T has shown its domestic investors are also still keen on the credit. On December 6, AT&T raised US$4bn with a three-parter priced via BofA Merrill and Goldman Sachs.

Official guidance on the three-year was 50bp-55bp over Treasuries; 80bp-85bp over for the five-year; and 105bp-110bp on the 10-year. The bonds priced at the tighter end on all tranches and new issue concessions were 6bp-13bp over outstandings. The book size built up to a whopping US$10bn. All three tranches are trading tighter or at the primary levels.

"The debt requirements for AT&T are not that large for a company of its size," said one senior banker.

"But its funding actions in the last few weeks have shown what most blue-chip issuers will be expecting from their underwriters in 2013 - currency- and market-agnostic solutions."

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