North America Investment-Grade Corporate Bond: AT&T's US$22.5bn seven-tranche bond

IFR Review of the Year 2017
3 min read
Eleanor Duncan

Calling it right

This summer, AT&T was facing a problem.

The telecoms company, already the largest corporate bond issuer by a substantial margin, was eyeing the US markets for an entry point for yet more debt – at least US$15bn of it – to help fund the company’s US$85bn mega-merger with Time Warner.

But AT&T had already built up over US$150bn in outstanding debt – the largest load in the market and almost 50% larger than second placed Verizon.

“The deal was going to take a gigantic issuer, and make them even more gigantic,” said Brian Cogliandro, head of debt syndicate for the Americas at MUFG Securities, which led the trade along with Bank of America Merrill Lynch, Goldman Sachs, JP Morgan and Mizuho.

Politics was involved, too: the merger still required the green light from the US Justice Department. And that wasn’t looking like a sure thing after then-presidential candidate Donald Trump, on the campaign trail in 2016, had made a point of promising to block the merger.

So how to get investors to take on more of AT&T’s debt against this kind of backdrop?

The resulting deal was a masterclass in good timing and execution.

AT&T, rated Baa1/BBB+/A–, came to market on July 27, catching the last of a red-hot market just before the August lull and subsequent volatility – and on the same day that Triple B spreads hit a then-post-crisis low.

In addition, the new bonds were launched the day after a shining results announcement, with AT&T’s second-quarter profits beating Wall Street estimates.

The company had built itself a nice runway to the trade, including taking a bit of pressure off the US market by tapping euro and sterling investors the previous month with €7bn and £1bn trades, respectively. The US dollar component was the final piece of the puzzle.

Investors ran rampant over the bonds. The order book peaked at US$60bn, allowing AT&T to upsize the deal from the US$15bn originally discussed to US$22.5bn at launch, making it the third-largest bond deal ever and the largest bond offering since January 2016.

The demand enabled AT&T to bring in spreads by 15bp–25bp across the seven tranches – six fixed-rate pieces and one floating-rate tranche with maturities of between 5.5 and 41 years. The company was judged to have paid new issue concessions ranging from 2bp to 9bp. Investors are protected by a special mandatory redemption feature at 101.

And while there was (and still is) no certainty that regulators will approve the merger, the climate was so welcoming for borrowers at that moment that the company might well have brought a new deal anyway, a banker away from the deal said at the time.

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