We are going to see the biggest corporate bond deal price tomorrow.? Verizon is raising money to buy out Vodaphone’s 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.
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
This deal seems more about VZ management’s desperation to create the appearance of growth than anything else.
This is the same management that tried to sneak in a $5 monthly charge last Christmas for the “privilege” of paying one’s bill. And they jammed this unilateral decision in on Dec 26th, hoping that most of their customers wouldn’t notice. The scam angered so many customers that it was repealed within a week. The damage to customer loyalty is still playing out.
Lots of customers are also suffering from device upgrading fatigue. And the sad truth is that most of smart phones have not yet delivered the conveniences needed to justify their cost. Outside of e-mail, Google Maps, and games — the mobile phone application market is rather uninspiring. Constant Twitter and Facebook updates do not pay the bills, and never will — not even for those that say they love Facebook. There are millions of apps, none of which really do anything — too much hype.
Both Verizon and AT&T have already acknowledged the update fatigue problem. But far from increasing subsidies, phone manufacturers have cut them. The phone network companies haven’t been able to find revenue to replace this.
Take 3: the phone companies that promised unlimited data **in writing** are now saying data is limited. Death to high bandwidth apps like YouTube
The phone companies claim this scam is about limited bandwidth — but then they offer unlimited talk in the same plans. Lets stop kidding ourselves here guys: all the data is transmitted as digital. There is no difference between voice bits and data bits. Storing a video on your computer does not cost any different than storing a spreadsheet or storing an MP3.
Its all digital data. The distinction between talk and data and texting is about maximizing revenue — not about network costs.
And for investors, the key point is that both T and VZ have already played this card too.
Meanwhile, consumers are pushing for family data plans, shared minutes, buying replacement phones from Amazon or Walmart — in short we are all looking to contain costs.
This does not mean that all things Verizon are bad — it just means that revenue has probably peaked in the near term (the next few years). Verizon will struggle to get the cashflow to pay pensions and debt servicing, while consumers look to cap (and possibly reduce) cell phone bills.
The historical deals that come to mind for me are all the optical fiber companies in the late 1990s that issued staggering amounts of debt to lay optical fiber that still hasn’t been used.
Add the constraints to demand for the new debt issuance that David Merkel talks about above …
Update: the 10yr “tranche” of Verizon’s new debt sold at 225bp over 10yr Treasuries … meaning Verizon is paying about double the yield that Apple paid for its 10yr issuance last June
Apple iPhones now come in new colors, same high price. But now they will send your fingerprints to the NSA without your approval