Brave new world
Every once in a while, a deal comes along that simply breaks the mould – and redraws the map of what can be done in the global capital markets. The bond and loan package to fund Verizon’s US$130bn acquisition of Vodafone’s stake in Verizon Wireless was a deal like that. For changing the landscape of the possible, it is IFR’s Americas Financing Package of the Year.
In retrospect, the only thing that isn’t surprising about Verizon’s record-busting financing package is the psychological impact it has had on the market. Nothing had been seen like it before – but many now believe it has blazed a trail for similar deals in future.
The eight-tranche bond doubled the size of Verizon’s debt and, at US$49bn, was bigger than the three previous record deals put together. The US$61bn loans piece was the largest committed financing in history and the largest bridge loan of all time. The sheer size and scope seemed somewhat unbelievable at the time, but there is little doubt it moved the goalposts on the field of possibility.
“It has reset the conversations around global finance by 180 degrees,” said Paul Spivack, head of investment-grade bond syndicate for Morgan Stanley, which was joint bookrunner on the bond and the loan alongside Bank of America Merrill Lynch, Barclays and JP Morgan.
In some ways, it had all been a long time coming. Verizon had long coveted the 45% stake in its mobile business that Vodafone owned, and at times the relationship between the US and UK telecoms giants was anything but special. But with its cash requirement set to more than double, Verizon increasingly saw that cashflows from the wireless unit would exceed new debt costs – if indeed it could obtain debt capital cheaply enough. With the added pressure of rates volatility thrown into the mix when it seemed the US Federal Reserve might start tapering, this whopper of a deal got put together in fairly short order.
In June Verizon sweetened its offer to US$120bn from US$95bn previously. But that still was not enough. Vodafone took less than a fortnight to come back with a counter-offer: net proceeds of US$140bn, all cash, for the total consideration. In addition, it demanded the deal on a UK-style certain-funds basis. Verizon’s banks would have to stump up a lot – a very lot – of cash.
In the end, Vodafone settled for US$130bn in cash and US$60bn in stock. Size meant sacrificing spread, and quite a bit of it – Verizon had to offer a 50bp new-issue concession on the bonds, on top of the 50bp widening its curve had seen in the secondary markets after the acquisition announcement was made. The bonds tightened a dramatic 100bp after pricing – good news for Pimco and BlackRock which were allocated US$8bn and US$5bn of bonds each.
But getting banks to lend the US$61bn bridge – with each underwriter committing a hefty US$15.25bn – required almost a guarantee that it would be taken out quickly. Success depended on the support of real power-brokers in the bond markets.
“What we knew was that we were going to be asking a lot of banks for amounts that were well outside their comfort zones,” said Peter Hall, global head of investment-grade loans at Bank of America Merrill Lynch. “These were commitment sizes that were probably larger than most deals.”
It remains to be seen, of course, who will follow the footsteps of Verizon. But as in so many other areas, new records are often quickly broken themselves. The paradigm shifts, and everything is changed forever.
“All of a sudden,” said Spivack, “all kinds of activities can now be contemplated.”
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