By William Hoffman
NEW YORK, April 3 (IFR) - After nearly three years of legal wrangling and rumoured bond issuance, telecoms company T-Mobile came to the US high-grade market on Thursday to raise debt for its merger with Sprint.
The US$23bn merger that was first announced in June 2018 and completed on April 1, officially making T-Mobile the third-largest wireless provider in the US.
T-Mobile raised US$19bn on Thursday after launching a five-part deal that will cover in full a bridge loan set up earlier in the week.
While T-Mobile is a high-yield company with Ba3/BB/BB+ senior unsecured ratings, Thursday's deal carried investment-grade ratings of Baa3/BBB–/BBB, thanks to the bonds senior secured status.
Order books peaked at US$74bn, quickly erasing doubts over whether T-Mobile could raise the full US$19bn in the dollar market at a time when coronavirus-driven volatility continues to weigh on sentiment.
Indeed, the company played it safe on Wednesday's investor calls, talking a smaller size of US$10bn–$15bn. Some had also thought it might even have to go to the euro market to top up what it lacked in dollar funding.
Despite such doubts, record volumes in the primary market have proved that investors still have plenty of money to put to work even as the asset class suffers massive outflows.
Earlier this week, tech company Oracle upsized a US$10bn deal to US$20bn at launch, though the higher-rated Single A credit offered a sizeable 30bp new-issue concession to take out that size.
T-Mobile, on the other hand, started initial price talk tighter than some investors had expected and tightened by 37.5bp–50.5bp at launch, causing an inverted spread at the long end.
Bookrunners Barclays and Deutsche Bank launched a US$3bn five-year at 312.5bp over Treasuries, a US$4bn seven-year at 325bp, US$7bn 10-year at 337.5bp and a US$2bn 20-year and US$3bn 30-year at 325bp over.
"The market was hoping that on a 10-year it would come at initial price talk of 400bp and then price in the mid-300s, so initial talk on the Street is it's coming tighter than expectations," one investor said.
“In general, we think their pricing is ambitious given the amount of execution risk for the transaction,” said another.
On the one hand, it makes sense that demand would be strong for T-Mobile.
Money has long been set aside for this highly telegraphed deal and telecoms names are considered exceptionally well positioned to navigate the economic downturn caused by the coronavirus outbreak.
Cruise line Carnival (rated Baa2/BBB–) is in a severely distressed sector, but still managed to price a US$4bn deal (see Top News), so a telecoms name with investment-grade aspirations should have no problem, said David Knutson, head of credit research at Schroders.
"T-Mobile benefits from limited direct Covid-19 risk, which we expect to be a key source of support for the deal," CreditSights noted in a report.
On the other hand, the high-yield company is issuing into a much weaker market than it intended nearly three years ago and has a lot to prove as the two entities combine.
Both S&P and Moody's executed expected one-notch downgrades on the completion of the merger, noting that leverage would rise to the four times debt-to-Ebitda level this year from around 2.6 times.
"Cost synergies will be offset by near-term integration expense and higher churn on the legacy Sprint network, resulting in limited Ebitda growth and free operating cashflow generation," S&P wrote in its report.
"These factors will likely constrain leverage improvement over the next year."
Final spreads landed wide of AT&T's curve but tight to Charter Communications' secured curve, according to MarketAxess data.
For example, AT&T's 4.55% 2049s (rated Baa2/BBB/A–) were seen trading around 292bp over Treasuries last week – 33bp tighter than where T-Mobile landed its new 30-year bond.
However, a more apt comparison was the more similarly rated Charter (Ba2/BB+) secured curve, which most investors accurately predicted T-Mobile would price through.
Charter's 4.8% 2050s were trading around 342bp over, or 17bp wide of where T-Mobile priced. However, secondary movement on Thursday had the note tightening more.
(This story will appear in the April 4 issue of IFR Magazine.)
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