Bates Research - 12-05-13
Verizon Debt Issuance
In a record setting deal, Verizon issued $49 billion worth of bonds in connection with its $130 billion buy-out of Verizon Wireless from Vodafone. While Verizon's acquisition is the largest since 2000, and the third largest of all time, there is not much here for investors to get excited about. Verizon Wireless was originally formed as a joint venture between Vodafone and Verizon (then Bell Atlantic and GTE), and has turned out to be immensely successful over the years. Not satisfied with 55% ownership, Verizon is buying out the remaining stake from Vodafone, who will largely distribute the money directly to shareholders. This deal is unlikely to generate a lot of corporate change, or new investments. Verizon's move comes at a time when many are already questioning how much corporations are contributing to economic growth in the wake of the Credit Crisis. This can be seen by contrasting the low level of corporate fixed investment (15.8% of GDP as of Q2 2013) to the high level of corporate profits (12.6% of GDP as of Q2 2013) in the charts below.
How did investors respond to the new issuance? Despite the concerns noted above, quite favorably. This is largely a result of a continued search for yield, as Treasuries continue to trade at historically low rates despite having increased over the course of this year. The favorable view of corporate bonds has also been helped by low default rates, with S&P reporting that the 12-month trailing speculative grade rate hit 2.5% at the end of June. With a rating of BBB+, Verizon sits on the lower end of the investment grade scale, but comfortably above the speculative grade line. The majority of Verizon's issuance came in the form of 10-year and 30-year bonds (see table below), making comparisons with Treasury securities easy.
The 5.15% coupon on the 10-year issuance gave investors more than 200 basis points in excess of 10-year Treasury rates, which hovered around 3% during the offering period. At 6.55%, the 30-year issuance provided investors a similar excess (about 250 basis points) over 30-year Treasury rates of about 4%. According to TRACE data, investors who were able to obtain 30-year issuance at the planned 98.883 cents on the dollar in the initial offering were able to turn around and sell at a price of $1.0726, for a hefty immediate profit. 10-year notes went from 99.676 cents on the dollar to $103.582. Active secondary market trading in the Verizon issuance is expected, as the standardization and large issuance volume will deepen the liquidity available on these bonds.
Earlier in the year Apple was able to place $17 billion worth of debt at even more favorable yields, thanks to lower Treasury rates (around 2% on a 10 year, as opposed to 3% at the time of the Verizon sale) and a higher credit rating (AA+). That deal also had few implications for corporate growth, as proceeds were used as part of a package to pay investors back $100 billion by the end of 2015 through dividends and share buy-backs. Management had previously determined that it would be more tax efficient to issue debt rather than to pay the dividend out of Apple's vast cash holdings (approximately $145 billion at the time of the debt sale).
For more detail on the state of the Corporate Bond market, please consult our Quarterly Strategy Insights report.