Verizon Bond Demand Aided by Index Weightings After Record Sale
Demand for Verizon Communications Inc. (VZ) bonds is being bolstered by investors seeking to align their holdings with debt indexes after the phone carrier doubled its notes outstanding with a record $49 billion offering.
Prices on Verizon debt have soared with the issuer poised to climb to the fourth-largest borrower from 12th on the Bank of America Merrill Lynch U.S. Corporate Index. The $45 billion of fixed-coupon securities in the sale may increase the New York-based company’s weighting on the Barclays U.S. Corporate Investment-Grade Index to 2.25 percent from 1 percent.
Verizon stoked investors’ appetite for the debt maturing in three to 30 years by paying a premium to assure it could raise the cash necessary to obtain full control of Verizon Wireless, the largest and most profitable U.S. carrier, in a $130 billion deal with Vodafone Group Plc. Funds that track benchmark indexes may have been left with less debt than their managers had hoped to own, according to Bank of America Corp.’s Hans Mikkelsen.
“Then they have to go out and buy,” Mikkelsen, the head of U.S. investment-grade credit strategy at the bank, said in a telephone interview from New York. “That could be one of the reasons that we saw the deal perform so well in the secondary market.”
Verizon’s sale was managed by Barclays Plc, Bank of America, JPMorgan Chase & Co. and Morgan Stanley, the company said in regulatory filings. The underwriters were paid $265.3 million in fees.
The surge in Verizon bonds rewarded investors with a profit of about $2.54 billion, according to data compiled by Bloomberg. The $15 billion of 6.55 percent bonds due September 2043, the largest security ever issued, have soared to 107.38 cents on the dollar from an issue price of 99.88 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield declined to 6.016 percent.
The 6 percent average coupon on $32 billion of new notes due in 10, 20 and 30 years compares with a 5.44 percent yield for similar-maturity bonds before the sale on a Bloomberg investment-grade index.
The higher rates offered by Verizon, especially in the longer-maturity portions, “are like spotting Bigfoot these days,” said Noel Hebert, the chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management, which doesn’t benchmark to indexes. “To the degree your allocation wasn’t terrific, you are going to have to go source some paper, or otherwise carry an underweight versus the index.”
The new Verizon bonds, which enter the Bank of America index at the end of the month, will also add more risk to the benchmark, Bank of America strategists led by Mikkelsen wrote in a report dated Sept. 11. The securities have an average duration of 9, compared with an index average of 6.4, they wrote. Duration measures a bond’s price sensitivity to yield changes.
Debt of Verizon accounted for 27.5 percent of the volume of dealer trades of at least $1 million yesterday, Trace data show. Second-ranked Bank of America represented 2.2 percent.
“There is no denying the degree to which Verizon will dominate the indices in which it is included,” CreditSights Inc. analysts led by Louise Purtle wrote in a Sept. 11 report. “That guarantees a certain level of consistent support for the bonds given the volume of passive, index tracking money in the market -- and also the sensitivity that even active managers have to index tracking error.”
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