When Verizon Communications (VZ) begins the largest sale of bonds in corporate history today—$49 billion worth—it will be courting investors with yields well above current market rates. The longest-term debt is expected to yield as much as 2.65 percentage points more than U.S. Treasuries, which are considered all but risk-free, that mature at the same time.
On the bonds that mature in 10 years, Verizon is expected to sell $11 billion of debt at a spread of 2.25 percentage points—or 225 basis points—higher than comparable Treasuries. The pricing makes Apple’s (AAPL) financial team look like geniuses for selling what was then a record amount of bonds, $17 billion, in April. The computer maker’s 10-year debt had a spread of just 75 basis points.
In today’s offering, Verizon will pay 47 basis points more than similarly rated companies on its 2023 debt, according to Bloomberg data. Verizon is paying this premium largely because of two factors. First, the Federal Reserve is widely expected to start reducing its $85 billion of monthly bond purchases meant to stimulate the economy. As the Fed cuts its spending, bond prices are expected to fall. Second, Verizon needs the money a lot more than Apple did. Apple tapped the debt market to return money to its shareholders, but it has plenty of cash on its balance sheet. Its bond offering was viewed as mostly a matter of convenience, since the company keeps most of its cash overseas to avoid paying U.S. taxes on it.
Verizon, on the other hand, is selling these bonds to help finance its $130 billion deal to buy out Vodafone’s stake in Verizon Wireless. The possibility that rates may go up in response to what the Fed does adds pressure on Verizon to borrow all the money it can now.
“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,” Scott Colyer, chief executive of Advisors Asset Management, told Bloomberg News.