By Danielle Robinson and Natalie Harrison
NEW YORK, Oct 9 (IFR) – Junk-bond investors are as greedy
for cheap telecom paper as their investment-grade peers, if the
blowout US$5.6 billion T-Mobile deal priced on Tuesday
is any guide.
The deal, the second-largest junk offering this year behind
Sprint’s US$6.5 billion deal last month, was almost
doubled in size from an initial US$3.1 billion and had a strong
enough book to see its five tranches soar between three-quarters
of a point to three points in dollar price in the aftermarket.
The deal is a secondary offering of non-reset notes that
make up half of the US$11.2 billion of T-Mobile debt Deutsche
Telekom took on its books to help its 74%-owned US
carrier to merge with MetroPCS.
Demand was impressive, considering it priced as news hit
that Telecom Italia had been downgraded to Ba1 by
Moody’s, bringing its bonds closer to junk.
The high probability of further acquisitions in the telecom
space is also looming on the horizon, including the possibility
that DT could sell T-Mobile to Sprint or Dish.
However, like Verizon and Sprint before it, T-Mobile
was able to get more than enough demand by offering a huge new
issue concession – an average of 50bp across the five tranches.
That’s significantly above the 25-30bp concession that
T-Mobile offered on a smaller US$500 million deal in August, but
inside the 75-100bp paid by Sprint in September. Verizon paid
about 50bp of concession for its record US$49 billion bond issue
in investment-grade.
DT also followed Verizon and Sprint’s strategy that issuing
as much as possible, even if it blows out new issue concessions,
is better than leaving more deals to do in the future.
“Investors would rather see larger deals come at once,
rather than piecemeal,” said one high-yield syndicate banker
close to the deal.
The deal rids DT of all of the so-called T-Mobile non-reset
notes on its books. The remaining US$5.6 billion of T-Mobile
debt still on DT’s books is resettable.
According to CreditSights, DT did a good job of convincing
investors that this wasn’t going to end up as another new bond
issue any time soon.
“The company has suggested that they view a sale of the
USD5.6bn in reset notes before the final rest dates as
unlikely,” said CreditSights in a client note.
“As such DT will most likely continue to hold a significant
proportion of T-Mobile debt for the foreseeable future.”
The majority of the deal, around 90%, was sold to high-yield
accounts, with investment-grade buyers making up the rest. The
small showing of investment grade buyers makes sense, given that
T-Mobile is not an upgrade story.
UNCERTAIN FUTURE
Some investors, however, were loath to become involved in
the deal because of the uncertainty around DT’s interest in
supporting T-Mobile going forward.
“DT has always indicated they have been reluctantly involved
in T-Mobile and they will continue to disengage as fast as they
can. If they do sell T-Mobile, that might not be a good event
for any bonds that were bought above par, given the Change of
Control language,” said a telecom strategist at an asset
management firm specializing in high yield.
The US$1.25 billion 5.5-year non-call 1.5 tranche priced at
102 versus price talk of 103 area; the US$1.25 billion 7.5-year
non-call 3.5 at par, in line with talk, and the US$600 million
9.5-year non-call 4.5 at 98, also in line with price talk.
The yield-to-maturity on the three tranches was 6.033%,
6.632% and 7.128% respectively.
The extra tranches, maturing in 2020 and 2022, were each
sized at US$1.25 billion, and priced at par and 99 with
yield-to-maturities of 6.541% and 6.887%.
According to CreditSights, the halving of its exposure to T-
Mobile debt “may increase DT’s willingness to involve TMUS in a
leveraging transaction.”
The COC put at a price of 101 is triggered if T-Mobile is
downgraded by two rating agencies.
Selling T-Mobile doesn’t necessarily mean it will be
downgraded, but the possibility that it could involve an
increase in T-Mobile’s leverage was enough to put some investors
off.
“Why would you want to buy some of these bonds above par,
when you could lose several points in price if Deutsche Telekom
sells T-Mobile?” the telecom strategist said.
According to one banker with knowledge of the transaction,
the unknowns about where T-Mobile would be in the next few years
“was something that investors factored into the pricing.”
T-Mobile has a market capitalization of around USD18bn,
valuing Deutsche Telekom’s 74% stake at about USD13.5bn.
Deutsche Bank was left lead on the issue with joint
bookrunners Citi, Credit Suisse, Goldman Sachs, JP Morgan and
Morgan Stanley.
(Reporting by Danielle Robinson and Natalie Harrison; Editing
by Marc Carnegie)
