REFILE-Verizon plans record-breaking bond as early as Wednesday

Fri Sep 6, 2013 10:34am EDT

* Blockbuster deal expected to be biggest corporate bond

* Rising Treasury rates prompts greater urgency

* Company seen weighting deal heavily to medium, long-end

By Danielle Robinson

NEW YORK, Sept 6 (IFR) - Verizon Communications is set to hit the bond market with a record-breaking issue of anywhere from US$20bn to US$30bn as early as Wednesday, after Treasury rates soared to levels not seen since 2011.

The 10-year Treasury rate hit 3.00% for the first time since July 2011 in late afternoon trading on Thursday, sending panic signals out to Verizon and other potential issuers that their cost of capital could blow out and their investor audience dissipate if they do not move immediately.

"Given what interest rates are doing, they will want to announce the deal immediately after they wrap up their investor meetings Tuesday," said one banker. "That could mean a deal announcement next Wednesday or Thursday if market conditions allow."

Verizon's concern is not just the rising cost of its own funding, but the shrinking size of potential demand with every basis point increase in Treasury yields.

"The tricky part is that if rates drift higher, there may just be less dollars available to invest overall, as investors move from bonds to cash or more defensive positions versus rates," said Matt Duch, senior portfolio manager at Calvert Investment Management.

"Overall market weakness will make any Verizon deal smaller than it would've been a few weeks ago."

Investors who have already been sounded out about the deal were left with the impression the company was targeting a deal of at least US$20bn and would take out as much as US$30bn given the opportunity, before moving to the euro and sterling markets the following week.

A London-based banking source also gave a Wednesday/Thursday timeline, adding that the group was likely to raise up to US$30bn before pricing 7-, 12- and 20-year bonds in euros and 20- and 25-year bonds in sterling.

Deals in more niche currencies could follow too, the source said.

The company has served notice that it plans to raise US$50bn in total in the bond markets to help finance its US$130bn purchase of the 45% stake in Verizon Wireless it does not already own.

Some investors think the initial deal may even end up as large as US$35bn, though many bankers away from the deal think a US$20bn-$30bn deal is more likely.

Observers believe the company is hoping to weight the deal size heavily at the intermediate and long end, in 10 and 30-year notes. Short-dated and floating-rate tranches are also expected, but rumours have circulated that Verizon may also include a 20-year or even a 100-year portion.

Investors dumped not just Verizon bonds last Thursday, but also those of AT&T as they prepared to buy the new bonds without adding duration or exposure to the name or sector. On Thursday Verizon's 2.45% 2022 bonds gapped out more than 25bp to Treasuries plus 160bp, making them 35bp-40bp wider than before news of the acquisition broke.

Investors have, nonetheless, responded with a resounding "yes" to whatever Verizon wants to issue, bankers said. "But they have to price it right so that you have no choice but to participate," said Duch.

EARLY PRICE TALK

Market players heard on Thursday that bookrunners Bank of America Merrill Lynch, Barclays, JP Morgan and Morgan Stanley were putting a 200bp number in investors' heads as a starting point for conversations on the spread level for a new 10-year deal.

Although that number may be radically different by Monday, depending on market conditions, those suggestions served notice that Verizon was willing to do what it takes to get its deal done.

Something around 200bp for a new 10-year is 30bp wider than the 170bp G-spread on the 2022s on Thursday, and 60bp wider than 140bp G-spread at the end of August.

"You could see a situation where they start socialising at around the 200bp level," said a syndicate manager not involved in the transaction. "They might then announce initial price thoughts a little wider, like around 205bp or 212.5bp, to capture demand."

Apart from the problem of rising rates, Verizon also has to contend with its ratings drop. Many large investors, such as security lenders, may not participate because the company is no longer Single A rated.

"Everyone is aware that going from Triple B to Double B means you lose a lot of investors, but it also happens when you drop from Single A into the Triple B space," said Michael Collins, senior investment manager at Prudential.

Verizon's deal will also come up against a considerable amount of competing supply running ahead of its deal. Sprint, for instance, last week hit the market with a US$6.5bn deal that was the talk of the US high-yield market. The deal is the second-largest bond offering on record and garnered US$11bn in orders.

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