Wall Street’s $40 Billion AT&T Pledge Offers Fees and Risks

  • While ‘lucrative’ for banks, regulatory uncertainty exists
  • Markets can swing while regulators dwell on deal approval

Wall Street Fee Payday Behind $40 Billion AT&T Pledge

Wall Street banks are writing some of their biggest checks ever to fund AT&T Inc.’s takeover of Time Warner Inc. as they seek a bonanza of fees. But there’s a dose of concern that the $40 billion loan pledge may get caught up in a regulatory impasse.

JPMorgan Chase & Co. has pledged $25 billion of the financing, with Bank of America Corp. providing the rest, according to a regulatory filing. That’s believed to be the most JPMorgan has ever promised for a deal, according to a person with knowledge of the matter who asked not to be identified without authorization to speak publicly.

The lending commitment alone would bring about $110 million to $130 million in fees for JPMorgan and Bank of America, according to estimates from consulting firm Freeman & Co. It also gives the banks an advantage on bond offerings that would find eager buyers among yield-starved investors. At the same time, the banks face the risk that the deal, along with a chunk of their balance sheets, would be tied up if regulators delay approving it.

“This could be an especially lucrative deal for the banking industry; they’re going to make a lot of money if the deal gets done” said Bert Ely, a banking consultant at Ely & Co. “The numbers on the credit piece look big, but I’m sure the credit risk will be spread widely. The big uncertainty hanging over this will be the battle for regulatory approval and what lender protections are included if the deal fails.”

T-Mobile Failure

A failed megadeal wouldn’t be the first for AT&T. In 2011, the company abandoned its takeover of T-Mobile USA because of regulatory hurdles. JPMorgan had lined up $20 billion to finance that deal.

Taking on commitments to underwrite large deals helps JPMorgan maintain its top position in leading corporate debt deals in the U.S.

JPMorgan has occupied the top spot for managing dollar bond sales from highly rated companies since 2010, according to data compiled by Bloomberg. The bank has been the top provider of similarly rated loans for each year since 2005, Bloomberg data show.

To help finance this proposed deal, AT&T brought in Bank of America as its partner on Thursday, keeping the number of participants to a minimum until the announcement, the person said. JPMorgan intends in the coming weeks to syndicate most of the $40 billion loan to other banks that already lend to AT&T.

Bridge Loan

The loan is structured as a bridge deal, a type of financing that a borrower repays by issuing debt in capital markets. In the case of AT&T, most of the deal will be replaced by high-grade bonds, with a potential portion in the form of term loans, the person said.

The interest on the loan will be tied to the company’s debt ratings, according to the filing. The margin will start at 100 basis points above the London interbank offered rate, plus a commitment fee. That’s based on the fact the company’s unsecured long-term debt has an A- rating from Fitch Ratings Ltd., the highest among the three biggest rating companies. There are additional duration fees scheduled.

The facility also includes a covenant that AT&T must keep net debt under 3.5 times its consolidated Ebitda, or earnings before interest, taxes, depreciation and amortization, according to the filing.

AT&T Chief Financial Officer John Stephens said on a conference call today that the company is targeting 2.5 times leverage at the end of year one and seeking 1.8 times by the end of year four. The company doesn’t expect a credit-rating downgrade and is committed to its investment-grade metrics, Stephens said.

But the lenders themselves are taking on other risks by using their balance sheet resources, according to Charles Peabody, a bank analyst at Compass Point Research & Trading. 

“That is dangerous because this deal could be hung up in antitrust wranglings for a long time,’’ he said. JPMorgan and Bank of America won’t be protected if credit markets swing and they can’t sell the debt for what they had anticipated, he said. 

Jessica Francisco, a JPMorgan spokeswoman, and Thomas Rottcher, a Bank of America spokesman, declined to comment. AT&T, based in Dallas, didn’t immediately reply to an e-mail and calls on Sunday.

The deal caps AT&T Chief Executive Officer Randall Stephenson’s vision to expand the company into media and entertainment as its wireless business matures. Gaining premium cable channels HBO, CNN and the Warner Bros. studio means AT&T becomes a content owner rather than just a distributor of video.

Yield Hunger

For the investors that would later be asked to buy bonds refinancing the bridge loan, the takeover means a juicy alternative to the more than $10 trillion of debt globally that’s yielding less than zero, driven down by easy-money policies from Europe to Japan.

“The investor base is starved for yield,” said David Hendler, founder of Viola Risk Advisors and a veteran bank analyst. “This would be a good earning asset in a low yield world -- which is very much in demand at the moment in the syndicate market. Banks are deposit-rich and looking to invest in loans.”

The prospective deal has raised regulatory questions ahead of the U.S. election, as both the Democratic and Republican presidential nominees expressed suspicion of blockbuster deals. Hillary Clinton has been critical of big mergers and has called for “reinvigorating” antitrust enforcement while her opponent Donald Trump broke with Republican orthodoxy on Saturday by saying he would block the Time Warner acquisition, arguing that such deals leave too much power concentrated among too few companies.

If AT&T’s deal doesn’t gain approval, it must pay a $500 million reverse break-up fee to Time Warner, according to a person with knowledge of the matter.

Bond Trading

Beyond collecting the fees that come from underwriting large takeovers, banks also benefit from trading that debt in the secondary market. CEO Brian Moynihan pointed to Bank of America’s debt underwriting business as a reason for his beat last week in estimates for third-quarter fixed-income trading revenue. 

Wall Street’s biggest investment banks have been taking a greater percentage of their overall revenue from issuing new debt and trading fixed-income products, which includes corporate debt, sovereign debt, currencies and commodities. Debt underwriting made up 11.3 percent of U.S. investment banks’ third-quarter revenue, about a percentage point more than in the same period two years ago, according to Bloomberg Intelligence.

U.S. banks relied on fixed-income underwriting and trading to propel 56 percent of their total investment banking business in the third quarter, a rise from 47 percent last year and 50 percent two years ago, Bloomberg Intelligence data show.

“These guys are fairly anxious to generate fee income. This is an area where you can make money very quickly. And very big money,’’ said Compass Point’s Peabody. 

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