AT&T bonds widened slightly on Thursday and Friday on reports that the US Department of Justice is laying the groundwork for a potential lawsuit aimed at stopping its deal with Time Warner if settlement talks do not work out.
If the deal is not consummated on or prior to April 22 2018, AT&T would have to buy back its fixed-rate bonds from its US$22.5bn blockbuster deal in July at a value of 101, and would have to pay interest that has accrued on the debt since it was issued in the summer.
Some of AT&T’s bonds from that deal are trading below par, according to MarketAxess data, meaning that at present levels, bondholders would actually make money if the deal fell through.
For example, AT&T’s 3.9% August 2027s widened over 2bp Friday morning to a G-spread of 163.3bp, putting the price of the bond just below par at 99.448.
And its 5.3% August 2058s have widened by up to 2bp to T+249bp, dropping the cash price of the bond at 99.750.
AT&T’s 4.9% August 2037s had widened out 5bp by Friday morning to T+203bp from previous levels Thursday morning, and the dollar price was 100.538.
But the story is a little different for European bonds that were part of AT&T’s M&A bond financing.
The company tapped the euro and sterling markets in June and raised €7bn and £1bn.
One trader said the implications of the DoJ reports were important.
“If the deal does not close before April 22, AT&T’s recently issued 2023s, 2026s and 2029s get called at 101. The bonds are trading much higher than that in cash price,” he said.
For example, AT&T’s 2023s now have a cash price of 101.61, according to Tradeweb while its 2026s were at 102.4. The spread on both bonds have widened out a little on the DoJ news.
The rest of the curve, including the recently issued 2036s which are trading up, would probably converge to Verizon comparable bonds, giving investors around 30bp-35bp in upside, the trader said.