Verizon Claws Yield From Record Sale: Corporate Finance

Verizon Communications Inc. (VZ) is clawing back some of the extra yield it paid investors in the biggest corporate-bond sale ever with a debt exchange that would extend maturities while trimming interest costs.

Verizon’s plan to swap as much as $12 billion of new notes for existing bonds will reduce the strain of more than $26 billion coming due in the next four years. Verizon added some of that debt to buy Vodafone Group Plc’s 45 percent stake in its wireless unit offering as much as $5.1 billion in extra interest to get the record $49 billion sale done in September.

The largest U.S. wireless provider is seizing on a 0.6 percentage point decline in investment-grade debt yields since its unprecedented offering to reduce annual and total interest costs. The swaps, announced July 23, come as the Federal Reserve reduces its quantitative-easing program and investors indicate they think its zero-interest-rate policy will end next year.

“This gives them a chance to flatten out their debt maturity profile and extend it, and at the same time save a few bucks doing it,” said Dennis Saputo, senior vice president at Moody’s Investors Service in New York. “It’s a shrewd transaction.”

‘Restricts You’

Robert Varettoni, a Verizon spokesman, declined to comment on the exchange offer.

The company plans to issue as much as $2 billion of notes due 2020 in exchange for existing debt maturing in 2016 and 2018, according to a statement on July 23. The company has $19.3 billion of notes maturing in those two years alone, according to data compiled by Bloomberg.

Verizon’s record-breaking bond sale saddled the company with $4.25 billion of 2.5 percent fixed-rate notes and $2.25 billion of floating-rate securities due in 2016. It also sold $6.5 billion of debt maturing in 2018.

“If you have a lot of debt coming due in the near term, that restricts you because you have to have a lot of liquidity,” Dave Novosel, a Chicago-based senior bond analyst at Gimme Credit LLC, said in a telephone interview. “By extending these out, they don’t have to worry about refinancing.”

The company also plans to swap as much as $4.5 billion of notes due 2046 for debt maturing from 2029 to 2039 and $5.5 billion of bonds due 2054 in exchange for securities maturing between 2038 and 2043, according to the statement.

Biggest Security

Verizon has $23.1 billion of debt maturing in 2037 and beyond, Bloomberg data show. That mainly comprises $15 billion of 6.55 percent notes maturing in 2043, which was part of September’s bond sale and is the largest corporate debt security issued.

Those notes, which are among 11 Verizon is offering to exchange, fell 0.2 cent yesterday to 127.2 cents to yield 4.81 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The hypothetical total exchange price for the bonds is 127.9 cents on the dollar, according to the company statement.

The exchange offers may save Verizon $100 million to $300 million by reducing its interest expense, said Saputo of Moody’s. The number depends on how much debt the company ends up issuing and under what terms.

The yield to maturity of the Bank of America Merrill Lynch U.S. Corporate index has fallen 0.6 percentage point since the record deb offering.

When Verizon sold $4.5 billion of notes in March to retire near-term debt, the company saved “in the $100 million-to-$200 million range,” said Michael Altberg, an analyst at Standard & Poor’s.

Added Bonuses

The savings are seen by ratings firms as an add bonus to Verizon’s main goal of spreading out and extending liabilities.

“In the grand scheme of things, when a company has $110 billion of debt it’s not going to move the needle that much,” Altberg said of the potential savings.

S&P rated the proposed notes BBB+, and Moody’s said in a July 24 report that it expects to grade them an equivalent Baa1, the same as the company’s current grades.

Verizon is seeking to refinance the debt just as the Fed holds its overnight interest-rate target near zero for a sixth year while it winds down a bond-purchase program that has suppressed debt yields.

Fed Chair Janet Yellen said this month that the central bank needed to continue its stimulus programs even after the jobless rate fell to an almost-six-year low of 6.1 percent.

Investors are betting the economy will be strong enough for the Fed to start increasing interest rates next year. There is a 62.5 percent chance the Fed will raise rates to at least 0.5 percent by July 2015, based on fed funds futures.

“I think the sense is that we’re at a very good point in the market,” Novosel said. “There’s a good chance interest rates will go up in six to 12 months because of actions the Fed takes.”

To contact the reporter on this story: Adam Janofsky in New York at ajanofsky4@bloomberg.net

To contact the editors responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net Mitchell Martin

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