Financing Package: AT&T’s US$21.5bn bond exchange

IFR Awards 2020
5 min read
William Hoffman

Refis and exchanges
For pushing the boundaries of what is possible in a refinancing package at a time when companies are eager to retire high-coupon debt and replace it with new low-cost bonds, AT&T’s US$21.5bn bond exchange is IFR’s Financing Package of the year.

Financing Package

Every treasurer and CFO in the world knew that 2020 was the year to refinance debt as investors fled to the safety of government Treasuries amid the pandemic, resulting in ultra-low funding costs for corporations worldwide.

Many companies were retiring near-term debt through tender offers and calls, but telecoms company AT&T took its refinancing efforts a step further by exchanging long-dated high-coupon debt with even longer bonds at a lower cost.

From August to September AT&T targeted 42 series of notes and convinced investors to exchange into a new three-part US$21.5bn bond offering in the largest bond exchange from a corporation.

The outstanding bonds were set to mature between 2031 and 2057 with coupons ranging from as low as 4.30% to as high as 8.75%.

In exchange for those bonds, the company offered investors cash plus new 3.50% 2053s, 3.55% 2055s and 3.65% 2059s, which were priced at 99.418, 99.404 and 99.382, respectively, to yield 3.53%, 3.58% and 3.68%.

In all, the company issued US$7.5bn of the 2053s, US$7.5bn of the 2055s and US$6.5bn of the 2059s, saving itself some US$150m in annual interest payments, according to a report from research firm CreditSights.

“It's a game changer in terms of the size they executed on,” said James Gutow, managing director at Barclays, which helped lead the exchange.

“They have a very large debt portfolio and some meaningful debt towers across the curve so it was an eye-opener in terms of what was achievable.”

AT&T was somewhat pushed into doing the exchange because it so exhausted its ability to do tender offers and was looking for new ways to lower its upcoming debt towers.

In 2019, AT&T tendered for 62 series of notes pushing US$5.8bn of outstanding debt further out the curve. Then in summer 2020, the telecoms company priced an US$11bn bond that was used to fund a tender offer.

“We’re in unprecedented times in terms of the frequency issuers are coming to market in order to get enough liquidity,” said Barbara Mariniello, head of debt capital markets Americas at Barclays. “So, an exchange is a different lever that doesn’t count as a trip for new issuance.”

Limiting its trips to the market mattered to AT&T, which has been one of the most prolific issuers of new bonds in the last few years.

In 2016 and 2017 the company raised US$42.5bn in the US primary market before staying largely quiet in 2018 and 2019. Then with the pandemic in full swing AT&T returned with another US$23.5bn of US-dollar issuance in the fourth and sixth largest deals of the year.

It also sold the largest Formosa bond in years – a US$1.25bn 30-year non-call five from December 2019 – and US$16.5bn-equivalent of issues in the euro and US dollar preferred and senior debt markets.

As companies have embraced these tender refinancing trades and tendered for short-term debt in 2020, more could take a page from AT&T’s playbook and look to exchange medium and long-term debt.

Indeed, following AT&T’s jumbo exchange, Verizon a month later priced its own US$4.7bn exchange offer.

“The Verizon deal was done for a similar purpose, which is to take advantage of the rate environment and the generationally low long-end yields to do a leverage-neutral trade,” Gutow said.

When all is said in done, AT&T’s liability management exercises helped it issue tens of billions of new debt in 2020 while technically reducing debt by some US$500m.

Perhaps more importantly, by pushing its debt further out the curve it no longer faces multiple US$10bn-plus annual debt maturities. Over the next 10 years it owes no more than US$7bn in a single year of bond maturities.

Treasurers saw the environment as an opportunity to clean up balance sheets at time when investors may turn a blind eye to the costs involved.

AT&T’s index DV01 – a measure of duration, or bonds' price sensitivity to interest rate moves – is up more than 40%, said Jason Shoup, head of global credit strategy at Legal & General Investment Management America.

And with Treasury rates expected to rise this year as the Covid-19 vaccine is distributed and the economy recovers from the pandemic, duration risk will continue to be an issue for investors.

Still, duration risk, of course, can be hedged, and some investors are happy to do that as they seek higher yields further up the curve.

"It is really about the spread," said Jim Caron, portfolio manager for global fixed income at Morgan Stanley Investment Management. "If you think the spread is attractive, then you buy the bond and hedge out the interest rate risks."

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