We are going to see the biggest corporate bond deal price tomorrow. Verizon (VZ) is raising money to buy out Vodaphone’s (VOD) 45% stake in Verizon Wireless.The amount sold will be at least $20 billion, and could be as high as $50 billion.They are going to have to pay up to do so, because:
- Verizon already has almost $50 billion in debt
- Large deals run into the position limits of institutional bond investors.
Institutional bond investors typically have holdings limits based on:
- Percentage of exposure to a sector
- Percentage of exposure to an industry
- Percentage of exposure to a ratings category
There will be other limits tailored to the needs of the client, which frequently stem from the length of their explicit or implicit liabilities. Explicit liabilities are simple — you know when cash will be demanded. Implicit liabilities estimate when cash will come or leave depending upon performance.
With respect to bond ratings, Verizon is in a tough spot, because it will be the largest nonfinancial bond issuer, with nearly $100B in debt, versus AT&T, with $76B in debt. That presents its own challenge, because the US telecom sector is dominated by two companies, Verizon and AT&T. How much do you want to buy when two companies dominate the sector? One failure would be huge to the bond market, but then again, duopolies tend to be profitable, so long as they don’t overleverage, like Fannie and Freddie.
Big bond deals are tough, because many bond managers will say, “I am already full on the name,” or “I can only take $XX million more of the name, and then I am full.” This is especially true for Verizon, since they are rated Baa1/BBB+/A- from Moody’s, S&P, and Fitch. That’s a high BBB rating, but far better to have a low single-A rating.
Thus the pricing has to be attractive, so that buyers that are not dedicated to corporates have interest — balanced funds, income funds, endowments and pension funds.
There will be other limits tailored to the needs of the client, which frequently stem from the length of their explicit or implicit liabilities. Explicit liabilities are simple — you know when cash will be demanded. Implicit liabilities estimate when cash will come or leave depending upon performance.
With respect to bond ratings, Verizon is in a tough spot, because it will be the largest nonfinancial bond issuer, with nearly $100B in debt, versus AT&T, with $76B in debt. That presents its own challenge, because the US telecom sector is dominated by two companies, Verizon and AT&T. How much do you want to buy when two companies dominate the sector? One failure would be huge to the bond market, but then again, duopolies tend to be profitable, so long as they don’t overleverage, like Fannie and Freddie.
Big bond deals are tough, because many bond managers will say, “I am already full on the name,” or “I can only take $XX million more of the name, and then I am full.” This is especially true for Verizon, since they are rated Baa1/BBB+/A- from Moody’s, S&P, and Fitch. That’s a high BBB rating, but far better to have a low single-A rating.
Thus the pricing has to be attractive, so that buyers that are not dedicated to corporates have interest — balanced funds, income funds, endowments and pension funds.
My Advice
Unless the yields are similar to those for BB junk bonds, I would pass on this deal. The reasons are simple:
- Typically the results on large corporate deals are bad in the short-run.
- You will not have a large audience to re-sell your bonds to. Most parties will be stuffed full.
- Technology is sufficiently dynamic that Verizon Wireless could lose its protected boundaries much as landlines have.
I am usually a skeptic of big bond deals. It is usually a sign of weak thinking among buyers. I avoided big deals during 2001-3, and ended up the better for it.
So be wary, and avoid Verizon bonds for a time, until the market normalizes. It looks like the syndicate will stuff the market full, but good.
Full disclosure: long VOD, and as a result will probably receive shares of VZ