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AT&T leverage and curve update
admin | 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. This material does not constitute research.
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.
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