Verizon Pays Premium to Top Apple Bond Record

Verizon Communications Inc. paid investors a premium on an unprecedented $49 billion of bonds, a cost Apple Inc. escaped during its then-record $17 billion offering four months ago.

The telephone company sold $11 billion of 10-year bonds today at a yield that’s 225 basis points more than Treasuries, according to data compiled by Bloomberg. The yield is 47 basis points more than investors demand to own bonds with similar maturities and BBB ratings. Apple issued $5.5 billion of 10-year bonds on April 30 at less than the market rate.

While Apple had $145 billion of cash and no debt when it tapped credit markets for the first time in more than a decade, New York-based Verizon will add to its $49 billion of bonds already outstanding to bolster a cash position that accounts for less than 2 percent of the $130 billion it needs to obtain full control of Verizon Wireless from Vodafone Group Plc.

“The new issue concession is significant,” Dorian Garay, a New York-based money manager at ING Investment Management, which oversees about $230 billion, said today in a telephone interview. “They’re trying to lock in interest rates now because of all the concern about rising rates, and at the same time lock up most of the funding for the acquisition, so they have to pay up for sure.”

‘Best Deal’

Verizon sold eight portions of dollar-denominated bonds, the data show. It’s also postponed investor meetings in Europe linked to the deal that were scheduled to begin tomorrow, according to a person with knowledge of the company’s plans, who asked not to be named, citing lack of authorization to speak publicly.

The spread on its 10-year portion compares with a relative yield of 178 basis points for bonds maturing in seven to 10 years with a Bloomberg composite rating of BBB. Those securities yielded 4.52 percent yesterday, Bloomberg data show.

Verizon “is not a company dictating terms,” said Matthew Duch, who helps oversee $12 billion as a money manager in Bethesda, Maryland, at Calvert Investments Inc., which plans to purchase a portion of the new bonds. “Verizon is not sticking to saying, ‘We need the best price,’ as much as, ‘We need to get the best deal done.’”

The company’s $15 billion of 30-year, 6.55 percent securities, the biggest corporate bond ever issued, traded as high as 107.6 cents on the dollar as of 1:12 p.m. in New York from an issue price of 99.883 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Rising Leverage

Apple, which yesterday unveiled two new iPhones, sold its 2.4 percent notes due 2023 at a spread of 75 basis points, Bloomberg data show. A day before the Cupertino, California-based company’s six-part offering, relative yields on AA ranked securities due between 2020 and 2023 were 83.6 basis points.

“Apple didn’t need the money” and “it was an opportunistic issuance,” said William Larkin, a fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts. “Verizon is a leveraged company, and they’re leveraging out again with this.”

Bob Varettoni, a Verizon spokesman, declined to comment on the sale. Verizon had its credit grades cut to Baa1 by Moody’s Investors Service and BBB+ at Standard & Poor’s on Sept. 2, with both firms citing heightened leverage from the acquisition.

The purchase may boost Verizon’s ratio of debt to cash flow to 3.4 from 3, according to S&P, which will contribute to a “significant” financial risk profile.

Investor Compensation

Along with $4 billion of floating-rate debt due in 2016 and 2018, Verizon also sold $4.25 billion of 2.5 percent, three-year, fixed-rate notes to yield 165 basis points more than Treasuries; $4.75 billion of 3.65 percent, five-year debt with a spread of 190 basis points; $4 billion of 4.5 percent, seven-year securities that pay 215; $6 billion of 6.4 percent, 20-year bonds yielding 250 more than benchmarks; and the 30-year portion with a spread of 265, Bloomberg data show.

The floating portion includes $2.25 billion of debt due in 2016 that pays 153 basis points more than the London interbank offered rate and $1.75 billion of five-year floaters that yield 175 more than Libor, the rate at which banks say they can borrow from each other.

Treasury Yields

The estimates “seem like it’s a pretty good balance” for investors to be fairly compensated for the company’s increase in debt, said Greg Tornga, who manages $7.5 billion as head of fixed income at Edge Asset Management in Seattle. “From an investor standpoint, the last thing we want to see is that the bonds got priced so tight that they get socked afterward.”

While Apple could hardly have picked a better time to sell bonds, Verizon is borrowing after a surge in benchmark borrowing costs. Ten-year Treasuries yielded 2.96 percent yesterday, climbing from 1.67 percent the day of Apple’s offering amid speculation the Federal Reserve may curtail its unprecedented stimulus measures.

“The environment is very different, with a high degree of expectations regarding tapering having a definite effect on the yield curve, which is working against Verizon,” said Alan Shepard, an analyst and money manager at Madison Investment Advisors. His firm oversees about $16 billion in Madison, Wisconsin.

Barclays, JPMorgan

The risk of a further rise in rates may be pressuring Verizon management to borrow as soon as possible. Francis Shammo, the company’s chief financial officer, said on a Sept. 3 conference call that “we’re going to move as quickly as we possibly can” to replace a $61 billion bridge loan to initially help finance the purchase with more permanent borrowings.

With the acquisition, Chief Executive Officer Lowell McAdam would obtain full control of Verizon Wireless after years of stalled negotiations with Newbury, England-based Vodafone. The deal is about the size of Verizon’s market value.

The bond offering was managed by Barclays Plc, Bank of America Corp., JPMorgan Chase & Co. and Morgan Stanley, the same banks that agreed to supply the bridge loan.

“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, the chief executive officer of Monument, Colorado-based Advisors Asset Management, which oversees about $11.6 billion, said in a telephone interview. “They need to do more financing in the future, so they’re pricing it cheap so it trades well after the deals close.”

Before it's here, it's on the Bloomberg Terminal.