CORRECTED-UPDATE 3-Verizon breaks record books with $49 billion bond

Wed Sep 11, 2013 4:20pm EDT

(Corrects Moody's rating to Baa1 from Baa2 in 15th paragraph)

* Pricing too good to turn down, 45bp spread tightening

* 3000 orders worth over $100 billion from 1,200 investors

* $240-249m estimated fee payday for underwriters

By Danielle Robinson

NEW YORK/LONDON, Sept 11 (IFR) - Verizon Communications priced a $49 billion eight-tranche deal on Wednesday, a record size for a corporate bond, sold at giveaway prices to lock in permanent financing for its $130 billion buyout of Verizon Wireless.

Anxious to complete the entire bond portion of its acquisition financing before a crucial Federal Open Market Committee meeting next week, Verizon decided to scrap $5 bilion-$10 billion of issuance in euros and sterling initially planned for next week do the entire amount in dollars.

At $49 billion, the deal is bigger than the three previous record-sized deals combined: Apple's $17 billion deal in April, AbbVie's US14.7 billion last November and Roche Holdings' $13.5 billion transaction in 2009. It is also larger than the GDP of some 90 countries.

In addition, Verizon also now holds the record for the largest three-year, five-year, seven-year, 10-year, 20-year and 30-year fixed rate tranches, according to Thomson Reuters/SDC data.

Sources with knowledge of the deal said Verizon and its key underwriters, Bank of America Merrill Lynch, Barclays, JP Morgan and Morgan Stanley, were shocked at the size of the order book that emerged by Tuesday afternoon.

The total bond underwriting fees Verizon paid were also substantial, estimated at between $240-249 million by Thomson Reuters/Freeman Consulting.

Some of the fee bonanza was also shared with several so-called passsive bookrunners, Citi, Credit Suisse, Mizuho, Royal Bank of Canada, Royal Bank of Scotland and Wells Fargo.

The $49 billion, along with about $12 billion of term loans, will completely refinance the $61 billion one-year bridge loan put in place last week to cover the debt portion of Verizon acquisition of Vodafone's 45% holding in Verizon Wireless.

Acquisition financing is often structured where banks will provide the acquirer with short-term loans to provide a bridge between making a bid on an asset and then putting permanent financing in place in the form of bonds and term loans.

AS QUICKLY AS POSSIBLE

"Verizon had a preference to take out as much as they could, as quickly as they could, in maturities that were as long as possible," said one source involved in the deal.

"And once they signaled to the maket that they were out for size and were not going to play the usual game of pulling in the spread as orders came in the book, investors were willing to come into the deal in size."

More than 3000 orders worth more than $100 billion poured in from more than 1,200 investors as a result of new issue concessions greater than 50bp on the fixed rate tranches. This was in addition to the 50bp spread widening seen in the last fortnight on outstanding Verizon bonds, in anticipation of the new deal.

Another source close to the deal said there was at least one order that exceeded $5 billion. Another source, not involved in the deal, said there was one order of $7 billion from one investor.

"The investor base viewed this as an opportunity to get exposure to a name with the cash flow and debt reduction trajectory to return to a single A rating in a few years," the source added.

Verizon is rated Baa1/BBB+/A- by Moody's, S&P and Fitch.

BARGAIN PRICES

The bargain basement pricing was made obvious when the longer-dated tranches snapped in as much as 45bp as soon as they were free to trade. The three-year fixed rate tranche was trading 65bp tighter than its launch spread.

"This deal has done very well but it was no secret the deal was priced very cheaply in order to accommodate the massive amount of size the company wanted to print," said Frank Reda, head of trading at Taplin, Canida and Habacht.

Tightening of 20bp is rarely seen in the investment grade market, let alone more than 40bp.

Yet investors considered the deal to have been appropriately priced, given its size, and the bigger risk Verizon faced if it didn't get all of its bond issued at once.

"This amount of tightening is very uncommon but this amount of debt issuance is also very uncommon," said Reda.

"It was better for the company to pay a little extra and make sure that they complete all the funding they needed rather than risk the deal going poorly and them having to come back to market at a later date."

Verizon was left in no doubt by the bond underwriters that its spreads could widen out 40-50bp on the news of a $20 billion-plus transaction, as well as the fact that, given the volatile markets of late, that it might have to offer a further 50bp as new issue concession.

It was not just the pricing that made the deal too good to refuse. Investors who benchmark themselves to bond indices were forced to take part simply because of the impact the size of the deal will have on the make up of indexes they measure their performance against.

"With an offering of this magnitude, some portfolio managers who measure their performance against a benchmark might consider themselves as taking on a certain degree of basis risk by not participating in this deal," said portfolio manager Bonnie Baha, who heads global developed credit at DoubleLine.

Its average coupon on the tranches was 3.59%, and with the 10, 20 and 30-year coupons ranging from 5.15% to 6.55%, the deal even attracted junk bond investors.

"Many people looked at the 5.2% expected coupon on the 10-year bond and realized that this is a blue-chip borrower that's offering more than some double-B names," said Mike Collins senior portfolio investment manager at Prudential. (Reporting by Danielle Robinson, John Balassi Michael Gambale, and Josie Cox in London,; Editing by Natalie Harrison and Alex Chambers)

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