Verizon Issues $6.25 Billion of Debt as Bond Sales Accelerate

Verizon Communications Inc. (VZ) sold $6.25 billion of notes in its first debt sale since 2009, helping to increase dollar-denominated corporate bond sales fourfold from last week.

Verizon, the second-largest U.S. phone company, was joined by Gilead Sciences Inc. (GILD), Volkswagen AG and Caterpillar Inc. (CAT) in issuing debt today. Borrowers have raised or are expected to sell at least $48.3 billion of dollar-denominated company debt this week, compared with $11.2 billion last week, according to data compiled by Bloomberg. New York-based Verizon plans to use proceeds from the sale to repay commercial paper and for general corporate purposes, according to a regulatory filing.

Verizon agreed in January to acquire Terremark Worldwide Inc. for $1.4 billion, a cash deal which Chief Financial Officer Francis Shammo said would be funded in part with commercial paper and “capital markets transactions.” Returns on debt from telecommunications companies are beating overall investment- grade corporate bonds this year, as relative yields for the borrowers tumble.

“The market conditions are ideal right now, especially with the Verizon name,” said William Larkin, a fixed-income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which oversees $500 million. “It’s all based off the cheap cost of capital.”

Extra Yield

Verizon’s $1 billion of 3-year floating-rate notes pay 61 basis points more than the 3-month London interbank offered rate, Bloomberg data show. A $1.5 billion portion of 1.95 percent, 3-year fixed debt pays 85 basis points more than similar-maturity U.S. Treasuries, while a $1.25 billion slice of 3 percent, 5-year fixed-rate debt yields a 105 basis-point spread. A $1.5 billion portion of 10-year 4.6 percent debt yields 135 basis points more than benchmarks and $1 billion of 6 percent, 30-year debt pays a 165 basis-point spread, the data show.

The extra yield investors demand to own debt from telecommunications companies instead of Treasuries fell to 154 basis points yesterday from 168 basis points, or 1.68 percentage points, at the end of 2010, according to Bank of America Merrill Lynch index data. That compares with a spread of 153 basis points on overall corporate debt. The difference in spread between the two indexes was 16 basis points as recently as November.

Bob Varettoni, a spokesman for Verizon, declined to comment on the sale.

Verizon’s issuance is the second-largest dollar-denominated debt sale this year, after yesterday’s $7 billion offering from French drugmaker Sanofi-Aventis SA. General Electric Co.’s finance arm and Petroleo Brasileiro SA, Brazil’s state- controlled oil producer, each sold $6 billion of debt in January, and are tied for the third-largest sale.

‘Pretty Strong’

Debt from telecommunications companies, including AT&T Inc., the largest U.S. mobile-phone carrier, and Deutsche Telekom AG, has gained 1.6 percent this year, compared with the 1.45 percent return on all investment-grade bonds.

“Telecom has been pretty strong,” Larkin said. “People have been looking for that safety.”

AT&T agreed this week to buy T-Mobile USA from Deutsche Telekom for about $39 billion in cash and stock to create America’s largest mobile-phone company. JPMorgan Chase & Co. agreed to help finance the deal with a $20 billion bridge loan.

Verizon said that it may sell up to $14 billion in common stock, preferred shares and debt in a filing with the U.S. Securities and Exchange Commission yesterday.

Commercial Paper

Verizon’s $3.7 billion of commercial paper outstanding, short-term borrowings that typically mature in 270 days or less, carries an average interest rate of 0.4 percent, according to today’s filing. Any remaining proceeds from the bond sale may be used for general corporate purposes.

Verizon plans to complete its offer for Terremark this quarter, as the company expands its business of helping companies store their data in the so-called cloud, the server computers maintained by other companies that provide access to electronic records and software.

Acquiring Terremark, which adds corporate and government customers for Verizon, is part of a broader strategy to make information from corporate data to music available to customers across devices and locations, Verizon said in a Jan. 27 statement.

Verizon sold $2.75 billion of 10- and 30-year debt in March 2009, Bloomberg data show.

The company’s $1.75 billion of 6.35 percent, 10-year notes priced at 98.52 cents on the dollar to pay a 387.5 basis-point spread, Bloomberg data show.

Today’s notes are rated A- by Standard & Poor’s and may be rated A3 by Moody’s Investors Service, Bloomberg data show.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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