By Danielle Robinson and Joy Ferguson
NEW YORK, Aug 16 (IFR) - T-Mobile USA CEO John Legere’s no holds-barred approach to attacking the wireless stronghold of dominant duo AT&T and Verizon in the US is working its magic in the bond markets.
This week, about 150 bond investors poured several billions of dollars into T-Mobile USA’s order book for a USD500m five-year non-call two offering, despite the fact that its 74% owner, Deutsche Telekom, is looking to offload USD11.2bn of bonds from its US subsidiary into the market.
DT has filed a shelf to sell the USD11.2bn of T-Mobile USA debt it inherited from providing an inter-company loan. Another headwind is the rumour that DT, having failed to sell T-Mobile USA to AT&T, might consider DISH Network as a suitor.
That sort of hair on a credit would normally destroy its chances of selling anything in the bond market, and especially one in such an intensely competitive, low-margin sector as wireless telecoms.
Yet the deal not only attracted huge demand, but was priced inside comparables and proceeded to jump a whole point in price on the break, thanks to the stunning turnaround of the company this year under the leadership of its feisty new CEO.
“CEOs are normally very reserved, but Legere is out there bragging about T-Mobile USA’s performance and bashing his competitors - and it’s working,” said one credit strategist.
“He’s really backing it up with a very impressive turnaround.”
Since taking the job last September, Legere has based his strategy on pushing the buttons of AT&T and Verizon’s aggravated customer base.
“By fixing the things that drive them mad, like contracts and upgrades, and freeing them from the two-year sentences imposed on them by our competitors, they are choosing the new T-Mobile in unprecedented numbers,” said Legere in a press release.
His bluster was backed up by news that T-Mobile gained 1.1m new customers in the second quarter - including 685,000 contract subscribers - its largest customer growth in four years and compared with a loss of 557,000 a year ago.
This year, the company has also merged with MetroPCS, signed up to offer iPhones and begun an upgrade of its network quality and geographic reach.
The bond issue benefited from the earnings momentum, being priced at par to yield 5.25%, down from guidance of 5.375% and initial price thoughts in the mid-5.00% range. Pricing was inside its outstanding 6.25% 2021 eight-year bonds, trading at USD100.875 to yield 6.06%.
Once a name that traded wide to Sprint, T-Mobile now trades tighter, with Sprint’s unguaranteed 6.9% 2019s quoted at USD104.25 to yield 6.00%.
“The deal went very well, and probably did better than anyone expected,” said one syndicate manager. “It’s late into August, we have rising rates and we’ve seen lacklustre performance by other deals that were done earlier in the week.”
Investors were willing to take a bet that DT is not planning to shoot itself in the foot by dumping its USD11.2bn of bonds into the market, and expect it will instead eke them out over time.
And some argue that the event risk is already factored into its trading levels.
“With TMUS trading about 47bp wide of general BB credits, the market is already pricing in a significant probability of either a DISH transaction or a tough technical should DT sell its TMUS bonds to the public,” wrote Barclays.
Some investors also see better value in bonds issued by Sprint and T-Mobile, which offer about five to six times the amount of spread on an AT&T or Verizon bond.
“The question is, are you taking on five to six times more risk in doing so? I don’t think so,” said Scott Kimball, senior portfolio manager at Taplin Canida & Habacht, part of the BMO Global Asset Management Group.
The new notes were quoted at 99.5-99.8 on Friday, pulled down by the weak tone in secondary credit markets following a spike in interest rates.