Verizon’s record $49 billion sale of bonds to aid buyout

Thursday, September 12, 2013

NEW YORK - Verizon Communications Inc. raised $49 billion on Wednesday in the largest corporate bond deal ever.

The sale dwarfs the previous record, Apple’s sale of $17 billion in bonds in April, and proceeds from the sale on Wednesday will help Verizon buy the rest of its U.S. wireless business from partner Vodafone.

That $130 billion buyout of Vodafone is expected to rank as one of the biggest business deals ever when completed. Along with the money from its bond sale, Verizon will use cash and stock to pay for the buyout.

The debt will come due at eight different times, from three to 30 years. Demand for the debt was high, a sign that investors are still interested in buying higher-yielding bonds.

Despite the demand, Verizon had to pay a hefty price to investors: It priced $11 billion of its 10-year notes at a yield of 5.19 percent, according to a deal document obtained by The Associated Press, well above the 4.51 percent yield for similar bonds Verizon had issued previously. Apple, a company with near-pristine credit and $147 billion in cash, is paying investors who own its 10-year bonds a yield of 3.86 percent.

Verizon likely decided to pay higher interest rates because it needed to wrap up its $130 billion buyout quickly, bond investors said.

“[The buyout] is a big strategic deal for them and they needed the money,” said Michael Collins, senior investment officer of Prudential Fixed Income, who bought Verizon bonds in Wednesday’s sale.

Verizon’s huge bond sale comes at a critical time for bond investors. In June, Federal Reserve Chairman Ben Bernanke said the central bank was considering pulling back on its bond-buying program, which has kept interest rates at historic lows in an effort to stimulate the economy.

As a result, the yield of the U.S. 10-year Treasury note, the benchmark for all bonds public and private, is at 2.96 percent,almost double the 1.63 percent yield from early May.

In Apple’s $17 billion bond sale, “Apple didn’t need the money” and “it was an opportunistic issuance,” said William Larkin, a fixed-income portfolio manager at Cabot Money Management in Salem, Mass. “Verizon is a leveraged company, and they’re leveraging out again with this.”

Bob Varettoni, a Verizon spokesman, declined to comment on the sale. Verizon had its credit grades cut to Baa1 by Moody’s Investors Service and BBB+ at Standard & Poor’s on Sept. 2, with both firms citing heightened leverage from the Vodafone acquisition.

The purchase may boost Verizon’s ratio of debt to cash flow to 3.4 from 3, according to S&P, which will contribute to a “significant” financial risk profile.

The Verizon bond offering was managed by Barclays Plc, Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley.

“They have a limited window to get this deal done, so that’s why you see spreads so big that you could drive a truck through,” said Scott Colyer, the chief executive officer of Monument, Colo.-based Advisors Asset Management. “They need to do more financing in the future, so they’re pricing it cheap so it trades well after the deals close.”

Verizon shares rose 5 cents to close Wednesday at $46.52.

Information for this article was contributed by Ken Sweet of The Associated Press and Charles Mead, Matt Robinson and Callie Bost of Bloomberg News.

Business, Pages 23 on 09/12/2013