What does this building have in common with Pat Buchanan? Photographer: Scott Eells/Bloomberg
Verizon Loses Billions at Bernanke's Game
Verizon Communications Inc. rushed to get its record $49 billion bond offering completed on Sept. 11, a week before the Federal Reserve's big taper ruling. That has proven to be a costly decision for the company. It also is hard to blame Verizon for wanting to move so fast.
Verizon's bonds were rallying even before the Federal Open Market Committee said it had voted not to reduce the central bank's monthly bond purchases. A Sept. 18 Bloomberg News article, published a few hours before the Fed released its decision, did the math. Bloomberg News reporters Sarika Gangar and Scott Moritz calculated that the company "will pay as much as $5.1 billion more in interest for the certainty of completing the deal a week before the Federal Reserve may curtail its record stimulus." That figure has since grown to $6.3 billion, based on the assumption that Verizon could have completed the bond deal at current market rates.
The biggest piece of the eight-part deal was the $15 billion of 6.55 percent bonds due in September 2043. Those were trading at 112 cents on the dollar yesterday, about 12 cents more than the issue price. The increase in price reduced the yield to 5.71 percent. That translates into $125.7 million of extra annual interest expense on that tranche of bonds than if the company had sold them at current market rates.
Should Verizon's management and board be faulted for being impatient? Not in my book. They had to price the bonds attractively to entice buyers. And they didn't know what Fed Chairman Ben Bernanke and his colleagues would decide. If the Fed had sent interest rates soaring by reducing its monthly bond purchases instead of maintaining them, Verizon's bosses would have come out looking like heroes.
The situation at Verizon merely illustrates in stark dollar terms how crucial the Fed's decisions are to capital markets. Unfortunately, there's no way for Fed outsiders to play this guessing game with any particular skill. Verizon needed to do a bond offering to complete its purchase of Vodafone Group Plc's minority stake in the companies' U.S. wireless business. It wanted to get the deal done quickly, when it knew it could. Like a gambler playing roulette, Verizon put its chips on red, and the ball landed on black. Those are the breaks.
These days watching to see what the Fed will do next reminds me of an old Saturday Night Live skit in which Dana Carvey impersonated the Washington talk-show host John McLaughlin. It went like this. McLaughlin: "Issue Number 5: What number am I thinking of? Pat Buchanan!" He guessed "82," prompting McLaughlin to scream: "Wrong!" And around to the other three panelists he went, all of whom also were told their answers were "Wrong!" Then finally McLaughlin declared: "The correct answer is 134."
That character might have made an excellent Fed chairman. Where is Dana Carvey when we need him?
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)