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AT&T’s accelerated asset sales are constructive for debt

| October 11, 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 exceeds asset monetization target

Despite having already surpassed its net $6 billion to $8 billion asset monetization target this year, T announced that it has agreed to sell its Puerto Rican and U.S. Virgin Islands businesses to Liberty Latin America Ltd. for $1.95 billion in cash. The transaction includes network assets (which includes spectrum) as well as real estate/leases, customers (including 1.1 million of wireless subscribers) and contracts. The deal is expected to close within the next 6 to 9 months. Prior to the announcement, T had already achieved roughly $10 billion year to date from monetization/working capital initiatives.  This week’s sale announcement puts monetizations – both announced and completed – at over $11 billion for the year. That said, T has noted that they are more than confident of hitting their net leverage target of 2.5x by year end, which would be down from the 2.7x at the end of 2Q19.  Since the close of the Time Warner acquisition on 6/15/18, T has reduced net debt by $18 billion. With asset sales exceeding management’s target and the company comfortably within their target leverage range by year end, management will start resuming share repurchase activity in 4Q.  Share repurchases are expected to be executed on an opportunistic basis, as debt reduction still remains a priority.

The largest catalyst for spreads continues to be management’s ability to execute on asset sales, as they were imperative in helping T reach its approximate $20 billion of debt reduction for the year. Having exceeded its monetization target, management demonstrated its commitment to both rapid debt reduction and the leverage target. Notably it will take T less time to hit their short- term leverage target post the Time Warner deal than it did to actually close the deal.

Elliot Management takes a stake – a positive for bondholders?

Roughly a month ago, Elliot Management Corporation disclosed that it had taken a $3.2 billion stake in T.  In a letter addressed to T management, the hedge fund questioned some of management’s acquisitions, including DirecTV, and challenged them to rethink its strategic rationale behind holding on to certain assets that they deem non-core. Elliot Management’s view is that bigger is not always necessarily better, thereby making T an “outlier” in the communications sector as it continues to make large acquisitions.

Elliot Management’s call for T to shed some assets, particularly DirecTV, would be a positive for T bondholders as the asset is so large that a sale would require further significant debt reduction. This would accelerate debt reduction plans, help the company achieve its longer term leverage target of 2.0x, and enable T to shed an underperforming asset. DirecTV has been witnessing subscriber declines given the rise of streaming services such as Netflix, which has prompted the growing “cord cutting” movement. Elliot Management noted that T purchased DirecTV at the height of satellite. While T witnessed some subscriber growth at the unit post close (from July 2015 through the end of 2016), for the last 9 consecutive quarters, DirecTV has posted subscriber losses. DirecTV ended 2Q19 with 17.9 million U.S. subscribers, its lowest level in over 5 years.

Exhibit 1. DirecTV U.S. video subscribers – quarterly (subscribers in millions)

Source: Company Reports; Amherst Pierpont Securities

 Relative value

The outlook for T credit remains positive as the short-term leverage target should be hit by year end, and further debt reduction is expected as the company moves towards its 2.0x long term target. June projections were that the T curve could flatten relative to Verizon Communications Inc. (VZ), which made the 15- to 25-year part of the curve most attractive relative to VZ. Taking that a step further, T’s 20-year on-the-run versus off-the-run paper, and how steep that curve is relative to similar paper in VZ’s capital structure. T’s curve between its 4.85% 2039 bonds versus its 6.0% 2040 is currently 35 bp (g-spread). While the higher coupon accounts for some of the steepness, the pick up is attractive to move out the curve 15 months. Comparatively, the curve between VZ 4.812% 2039 bonds versus 4.75% 2041 bonds provides for less than 10 bp (g-spread) pickup for an approximate 32-month extension.  T could look to pursue a large waterfall tender for higher coupon debt, particularly if they were to pursue a sale/spin of DirecTV.  Even if a sale of DirecTV were not to materialize, T could take advantage of the attractive rate environment and pursue a debt financed tender for the high coupon debt.

Exhibit 2. T Versus VZ – 20-year curve

Source: Bloomberg; Amherst Pierpont Securities

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