Uncategorized

AT&T leverage and curve update

| June 14, 2019

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

AT&T’s bonds could outperform peers, in particular those of VZ, as the company makes further progress on debt reduction this year. The largest catalyst for the outperformance of T bonds will be management’s ability to execute on asset sales, which would contribute to the approximate $20 billion of debt reduction and demonstrate management’s commitment to the leverage target. Should a spin off/sale of DirecTV occur as part of those asset sales, the T curve should flatten much closer to that of VZ. The 15-year to 25-year part of the T curve looks most attractive, particularly the T 4.5% 2035 bonds and the T 6.375% 2041 bonds, which are wide to VZ by 67 bp and 76 bp (g-spread), respectively.  This compares to an approximate 45 bp differential in the 10-year part of the curve and a 48 bp differential in the 30-year part of the curve.

Expect further progress on debt reduction

As the year progresses, AT&T (T) will continue to make debt reduction a priority.  T ended 1Q with net debt of $169 billion, which was down from $171 billion at year end.  Leverage of 2.8x was flat to year end.  Management reiterated its forecast of $12 billion of free cash flow (after dividends) and an additional $6 to $8 billion of proceeds from non-core asset sales to go to debt reduction.  Based on estimates of $60 billion of adjusted EBITDA, management expects to end the year with roughly $150 billion of net debt bringing net leverage down to the 2.5x area.  As of 3/31/19, T had roughly $11.5 billion of debt maturing within one year.  That includes $650 million of TWX debt which matured on 6/1/19 and approximately $3.0 billion of commercial paper.

Exhibit 1: AT&T leverage update

Asset sales to date

AT&T completed the sale of its 9.5% minority stake in Hulu back in April for $1.43 billion.  The company also entered into an agreement to sell WarnerMedia’s headquarters in Hudson Yards for $2.2 billion under a sale/leaseback transaction, which is expected to close by the end of 2Q. Speculation has recently emerged about a potential combination of DirecTV and Dish, after a failed attempt to combine the companies in 2002. While its purely speculation at this point, if T were to spin off or even sell the DirecTV assets, it could help the company achieve its long term leverage target of 2.0x.

Exhibit 2: AT&T vs Verizon curve update

Source: Bloomberg, Amherst Pierpont Securities

Relative value

With further debt reduction expected in 2019, AT&T’s bonds could outperform peers, in particular those of VZ. The largest catalyst for the outperformance of T bonds will be management’s ability to execute on asset sales.  These asset sales are imperative in achieving the approximate $20 billion of debt reduction in 2019, while demonstrating management’s commitment to the leverage target. Furthermore, should a spin off/sale of DirecTV occur, the T curve should flatten much closer to VZ’s debt curve. The 15-year to 25-year part of the T curve looks most attractive relative to VZ, particularly the T 4.5% 2035 bonds and the T 6.375% 2041 bonds, which are wide to VZ by 67 bp and 76 bp (g-spread), respectively.  This compares to an approximate 45 bp differential in the 10-year part of the curve and a 48 bp differential in the 30-year part of the curve.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles