Wall Street banks are writing some of their biggest checks ever to fund AT&T's plan to take over Time Warner as they seek a bonanza in fees. But there's a dose of concern that the $40 billion loan pledge may get caught up in a regulatory impasse.
Details of the deal, totaling $108.7 billion when adding Time Warner's net debt, were released over the weekend. The proposed deal would create a media and telecommunications empire that owns many of the TV shows and movies it provides its subscribers.
JPMorgan Chase & Co. has pledged $25 billion of the financing, with Bank of America Corp. providing the rest, according to a regulatory filing. That's believed to be the most JPMorgan has ever promised for a deal, according to a person with knowledge of the matter who asked not to be identified without authorization to speak publicly.
The lending commitment alone would bring about $110 million to $130 million in fees for JPMorgan and Bank of America, according to estimates from consulting firm Freeman & Co. It also gives the banks an advantage on bond offerings that would find eager buyers among yield-starved investors. At the same time, the banks face the risk that the deal, along with a chunk of their balance sheets, would be tied up if regulators delay approving it.
"This could be an especially lucrative deal for the banking industry; they're going to make a lot of money if the deal gets done" said Bert Ely, a banking consultant at Ely & Co. "The numbers on the credit piece look big, but I'm sure the credit risk will be spread widely. The big uncertainty hanging over this will be the battle for regulatory approval and what lender protections are included if the deal fails."
A failed megadeal wouldn't be the first for AT&T. In 2011, the company abandoned its takeover of T-Mobile USA because of regulatory hurdles. JPMorgan had lined up $20 billion to finance that deal.
Taking on commitments to underwrite large deals helps JPMorgan maintain its top position in leading corporate debt deals in the U.S.
JPMorgan has occupied the top spot for managing dollar bond sales from highly rated companies since 2010, according to data compiled by Bloomberg. The bank has been the top provider of similarly rated loans for each year since 2005, Bloomberg data show.
To help finance this proposed deal, AT&T brought in Bank of America as its partner on Thursday, keeping the number of participants to a minimum until the announcement, the person said. JPMorgan intends in the coming weeks to syndicate most of the $40 billion loan to other banks that already lend to AT&T.
The loan is structured as a bridge deal, a type of financing that a borrower repays by issuing debt in capital markets. In the case of AT&T, most of the deal will be replaced by high-grade bonds, with a potential portion in the form of term loans, the person said.
The lenders are taking on other risks by using their balance sheet resources, according to Charles Peabody, a bank analyst at Compass Point Research & Trading.
"That is dangerous because this deal could be hung up in antitrust wranglings for a long time," he said. JPMorgan and Bank of America won't be protected if credit markets swing and they can't sell the debt for what they had anticipated, he said.
Jessica Francisco, a JPMorgan spokesman, and Thomas Rottcher, a Bank of America spokesman, declined to comment. AT&T, based in Dallas, didn't immediately reply to an email and calls.
The deal caps AT&T Chief Executive Officer Randall Stephenson's vision to expand the company into media and entertainment as its wireless business matures. Gaining premium cable channels HBO, CNN and the Warner Bros. studio means AT&T becomes a content owner rather than just a distributor of video.
For the investors that would later be asked to buy bonds refinancing the bridge loan, the takeover means a juicy alternative to the more than $10 trillion of debt globally that's yielding less than zero, driven down by easy-money policies from Europe to Japan.
"The investor base is starved for yield," said David Hendler, founder of Viola Risk Advisors and a veteran bank analyst. "This would be a good earning asset in a low yield world -- which is very much in demand at the moment in the syndicate market. Banks are deposit-rich and looking to invest in loans."
The prospective deal has raised regulatory questions ahead of the U.S. election, as both the Democratic and Republican presidential nominees expressed suspicion of blockbuster deals. Hillary Clinton has been critical of big mergers and has called for "reinvigorating" antitrust enforcement while her opponent Donald Trump broke with Republican orthodoxy on Saturday by saying he would block the Time Warner acquisition, arguing that such deals leave too much power concentrated among too few companies.
If AT&T's deal doesn't gain approval, it must pay a $500 million break-up fee to Time Warner, according to a person with knowledge of the matter.
Information for this article was contributed by Lisa Wolfson, Scott Moritz, Sonali Basak, Jacqueline Poh and Claire Boston of Bloomberg News.
Business on 10/25/2016