Verizon Communications prepared to sell $49 billion worth of bonds on Wednesday in what will be the largest investment grade corporate bond sale ever, trumping the previous record set by Apple’s $17 billion bond sale in April.
The huge issuance of corporate debt comes as Verizon moves to take advantage of low interest rates and finance its $130 billion deal to buy out Vodafone’s 45 percent stake in their Verizon Wireless joint venture.
Demand for the Verizon notes, which pay a generous yield compared with similar corporate bonds and government notes, far exceeded expectations, demonstrating the powerful appetite that institutional investors have for safe corporate debt with solid returns, and the ease with which big companies can raise large sums of money.
For companies looking to tap the debt markets to finance a deal, there has rarely been a better time than now. With interest rates low and investors eager to buy safe corporate bonds, Verizon had no problem financing the third-largest deal of all time.
“Timing is everything,†said Donna Hitscherich, a finance professor at the Columbia Business School. “There are deals happening now that we were talking about in the 90’s. The catalytic event here was willingness and available financing.â€
Verizon and Vodafone had talked about unwinding their joint venture for years, but talks accelerated in recent months, largely because interest rates were low. Explaining the timing of the deal last week, Verizon‘s chief executive, Lowell McAdam, noted that it made sense to strike the deal now, before the Federal Reserve begins raising rates, as is expected.
“The capital markets environment is favorable,†Mr. McAdam said.
But bankers said the availability of cheap financing alone was unlikely to lead to a boom in mergers and acquisitions, as many companies remain hesitant to do risky deals. Rather, for those companies considering a big deal, there is incentive to get it done as soon as possible to take advantage of historically low interest rates.
In the last few months, as interest rates have crept up, deal-makers have watched the markets closely for signs that deal financing might grow more difficult. And while rates have not yet spiked, the small increases have already made an impact.
People involved with the sale of Heinz to 3G Capital and Warren E. Buffett’s Berkshire Hathaway earlier this year say that that deal might not get done today. The premium paid for the company was already so high, that even slightly higher financing costs might have put a deal out of reach.
Verizon had taken out a $61 billion bridge loan in order to get the deal done. By selling bonds, the company will be quickly repaying the largest portion of that, a $49 billion capital markets bridge.
People briefed on the company’s financing said Verizon initially expected to sell about $35 billion in dollar-denominated debt, then turn to European markets to sell the rest. But because demand for the dollar bonds was so high, the company will not need to embark on a European sale at all.
For institutional investors, Verizon’s offering represents a welcome opportunity to lock in decent returns from a stable corporate issuer.
The yields on the bonds - a mix of fixed and floating rates notes stretching from three to 30 years - are better than most bonds being offered by similarly secure corporations, and more than government notes. A 10-year bond is offered at 2.25 percentage points more than the comparable Treasury note, or about 5.2 percent.
“Investors continue to sit on a lot of cash,†said Kevin Giddis, head of fixed income sales, trading and research at Raymond James. Mr. Giddis noted that with the equity and currency markets still shaky, locking in such rates was appealing.
“As investors look around with all the cash they have, 5 percent in recent memory doesn’t loo that bad,†he said.
Final pricing and allocation was expected to be announced Wednesday afternoon.
Global Corporate Investment Grade Bonds: All Time Largest Deals
| Source: Thomson Reuters | ||
| $16.958 | April 2013 | Apple |
| 16.328 | February 2009 | Roche Holdings |
| 16.324 | March 2001 | France Telecom SA |
| 14.657 | November 2012 | Abbott Laboratories-Research |
| 14.544 | June 2000 | Deutsche Telekom |
