The Deal: In Record Verizon $49B Notes Deal, Timing Was All

NEW YORK ( The Deal) -- The bad news for Verizon Communications ( VZ) is that it just paid higher borrowing costs on a record-breaking $49 billion bond offering backing its $130 billion acquisition of Vodafone's ( VOD) stake of Verizon Wireless than it would have at the start of the year.

The good news is that it isn't paying more. Plus, investors couldn't have been happier.

Locking in rates on almost $50 billion after 10-year Treasury yields have almost doubled to just under 3% can only be viewed as a good thing even if the company would have cut its borrowing costs substantially if it had been able to complete the deal for Verizon Wireless earlier this year.

"It was successful in the sense they were able to get the largest bond deal of all time done," said Gimme Credit LLC analyst Dave Novosel. "Having said that there was a cost to achieve that. The new issue premiums were very high."

"In that sense the investors who got in on this deal will be successful as well," he added.

Verizon inked the record-setting deal previously held by Apple ( AAPL), which issued $17 billion of bonds in April to back its $100 billion stock buyback plan.

Of course, Apple chose to do its offering because the cheap debt helped defray some of the tax consequences of tapping more of its $145 billion cash cushion to fund its capital return program.

Plus, there is that pesky timing issue. At the point at which Apple went out to the market, bond yields were still close to historic lows.

For instance, Apple's 10-year notes had a coupon of 2.4% versus the 5.15% coupon that Verizon just printed. Apple's spread to the Treasury yield was 75 basis points as opposed to Verizon's spread of 225 bps for the notes.

Yet, the premium Verizon was willing to pay lured investors in a big way. Orders poured into the offering, sending the book to approximately $101 billion, according to IFR Markets. The company saw so much interest in the United States that it was able to postpone a European notes offering, perhaps permanently.

The price shifted the investor viewpoint on the company. Gimme Credit put Verizon's debt on a sell recommendation in May and maintained it following the initial announcement of the deal, but with the attractive premiums, Novosel said he believed the newly issued bonds are currently a good buy for investors.

"I'm not surprised they got it done, but it's a monumental deal," said a capital markets attorney not involved in the transaction. "Rates are low, and people are looking for yield."

Not only that, this attorney said, but other aspects of the deal make it a win-win all around.

"I think it's a good deal for both," the attorney said. "It looks good for the company being able to lock in financing and the fact that it's very covenant lite."

Despite the massive size, sources said the terms look like a typical investment-grade deal. The deal did not include a change-of-control covenant, which is something large investment-grade offerings sometimes do in case an issuer loses its investment-grade rating.

With new issue premiums ranging from 50 bps to 70 bps, Novosel said that investors should be happy, too. He said premiums typically run from 10 bps to 30 bps unless companies are in extreme financial trouble. "I can't remember seeing premiums this high on investment-grade credits," he said.

It's also remarkable that Verizon was able to price all these notes at one shot. Sources said the company had originally considered selling bonds to back the deal over a period as long as nine months.

Novosel said the fact that Verizon was able to wrap up a deal of this size in one day instead of over a period of six to nine months speaks well for the company. And it should end up saving money for Verizon in the long run as rates are expected to climb in the future.

That said, Verizon is still paying more than most high-grade deals, making this look almost more similar to a high-yield offering. As a point of reference, the spread on Verizon's $11 billion tranche of 10-year notes was 225 bps to the 10-year Treasury. This is 47 bps above the average spread paid for BBB rated 10-year notes, according to Bloomberg.

The final deal includes $4.25 billion of 2.5% three-year notes, $4.75 billion of 3.65% five-year notes, $4 billion of 4.5% seven-year notes, $11 billion of 5.15% 10-year notes, $6 billion of 6.4% 20-year notes and $15 billion of 6.55% 30-year notes. It also includes $2.25 billion of three-year and $1.75 billion of five-year floating notes, which will be priced at the Libor equivalent.

Verizon is also arranging a $14 billion loan package to back the acquisition. The company took out a $61 billion bridge loan on Sept. 2 to back the deal initially. JPMorgan Chase & Co. acted as the administrative agent.

Barclays, Bank of America Merrill Lynch, JPMorgan and Morgan Stanley acted as joint bookrunners on the notes offering and are arranging the loan package.

A Debevoise & Plimpton LLP team consisting of Jeffrey J. Rosen, Michael A. Diz, Steven J. Slutzky and Peter A. Furci is advising Verizon on its debt financing.

--Written by Jonathan Schwarzberg

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