UPDATE 1-AT&T piles on more debt with US$12.5bn bond

5 min read
Americas, EMEA
William Hoffman

Adds launch details and investor comments

AT&T brought its first high-grade bond of the year Thursday, when it launched a US$12.5bn five-part offering, marking the asset class's fourth largest deal of 2020 and the telco's biggest since 2017.

Proceeds will be used to pay down an April term loan of US$5.5bn, but the company seized on the strong market tone to take out more size and add liquidity in order to help navigate the uncertain landscape that lies ahead, one lead banker said.

The transaction marks somewhat of a shift in strategy for AT&T, which earlier this year guided for limited senior unsecured issuance in favor of preferred stock.

Thursday's jumbo deal raised more US-dollar debt than it issued in all of 2019 (US$5bn) and 2018 (US$3.75bn) combined, according to IFR data.

The new US offering is also coming on top of a €3bn three-tranche deal offering earlier in the week.

AT&T was on a deleveraging path, but the new deal is more reminiscent of the AT&T of older trades, which helped it raise US$60bn over a three-year span from 2015 to 2017 to pay for the acquisitions of DirecTV and Time Warner.

Even so, investors still see the company taking a deleveraging route as it has already cut share buy backs and could explore asset sales.

"There is some chatter that they could spin off certain businesses like DirecTV," said Neil Sutherland, high-grade portfolio manager at Schroders.

"The market has opened up and given the overall funding costs it makes sense for them to access the market."

The telco had been looking to incrementally reduce debt by refinancing senior bonds over the next three years with US$5bn-US$15bn of preferred stock that receives 50% equity credit.

That strategy started in December when it priced a public US$1.2bn preferred note and continued in February with a US$1.75bn series C preferred share, which each received high-yield ratings for their lower position in the capital structure.

However some deterioration of its credit profile due to the Covid-19 pandemic has slowed the deleveraging plans.


AT&T reported that Covid-19 is starting to weigh on earnings through the loss of ad revenue, the cancellation of sports content, cord cutting and studio lockouts delaying original content.

"AT&T is a name where we have long had our concerns and Covid-19 will make it harder for the company to deliver on its strategic initiatives and to simultaneously de-leverage its balance sheet," Research firm CreditSights noted in a report.

"That said, when we look out over 2020, we do not view AT&T as so weakly positioned that it risks material credit metric deterioration or a downgrade to its agency ratings."

Indeed, a ballooning US$152bn debt stack did little to deter investors from piling in orders to the tune of US$38.6bn on Thursday's trade.

Bookrunners Bank of America, Goldman Sachs, Mizuho and Royal Bank of Canada tightened spreads by 30bp-40bp through price progression.

AT&T launched a US$2.5bn seven-year at 180bp over Treasuries, a US3bn 11-year at 210bp over, a US$2.5bn 21-year at 215bp over, a US$3bn 31-year at 230bp over and a US$1.5bn 40-year at 250bp over.

The bonds started with some 30bp-50bp of new issue concession but that was quickly erased as long dated notes landed some 5bp-10bp wide of outstanding secondaries.

For example the 5.15% 2050s were trading at around a G-spread of 225bp, according to MarketAxess data.

The transaction will add to its mammoth debt stack, but the runway ahead is relatively clear as no single year exceeds US$11bn, which AT&T can pay down through free cash flow.

In 2019 the company generated some US$28bn in free cash flow, and despite the pressures on the business, cash flows remain robust as it realizes more benefits from its US$85bn merger with Time Warner from 2018, according to a Fitch report.

For example, next week the company is launching a new premium streaming service called HBO Max that gives consumers access to old Time Warner TV properties such as Friends, The Big Bang Theory and Dr. Who.

Competitors such as Charter Communications and Verizon are expected to be more resilient through the recession but concessions on the new AT&T notes provide an attractive pickup to compensate for the added risk, CreditSights noted.

"Management has more levers to pull (e.g. capex and asset sales) if need be," the research firm noted.

"Its move to issue and term out maturities is a sound one, even if it has to pay-up to execute."

Biggest 2020 US IG bond deals IMAGEhttps://tmsnrt.rs/2VQZVD3