It’s all about the spectrum at Verizon
admin | November 13, 2020
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.
Verizon Communications Inc. (VZ) tapped the market recently for a sizeable $12 billion in new debt with proceeds largely earmarked for acquisitions, including spectrum licenses. Nationwide C-band spectrum auctions kick off in early December and the additional proceeds increase the company’s cash position to approximately $21 billion, of which $15 billion could be spent in the upcoming auctions. While some of the proceeds may be used to fund the previously announced acquisition of TracFone Wireless, VZ will be an aggressive competitor in the spectrum auctions as this mid-band spectrum is imperative to its long term 5G strategy. Despite the incremental debt there is value in the new deal, which witnessed some volatility post launch and is currently being offered at or close to launch spreads. Based on where secondaries were trading prior to announcement, there is about 5 bp of upside in the 5-, 10-, 20- and 30-year tranches and 10 bp of upside in the 40-year tranche.
Exhibit 1. VZ New Issue Launch/Fair Value Spreads
Source: Bloomberg TRACE; Amherst Pierpont Securities
Agencies Believe in Spectrum Spending
All the rating agencies affirmed VZ’s ratings (Baa1/BBB+/A-) upon the deal announcement. Both Moody’s and S&P also maintained their positive outlooks despite the incremental debt as their ratings and respective outlooks incorporated the potential for spectrum spending. Moody’s maintains the view that spectrum is the “most important core asset in a wireless network operator’s portfolio.” The agency goes on to note that investing in spectrum is akin to a long-term M&A strategy. That said, they expect the spectrum purchases will be monetized over time, similar to how synergies are realized. With VZ’s commitment to further debt reduction and a net leverage target of 1.75x-2.0x, slight increases in leverage for spectrum purchases are viewed as strategic and believed to strengthen the company’s operating profile. If all $12 billion of the recent debt issuance were used to fund spectrum purchases, net leverage increases from 2.1x as of 9/30/20, to just over 2.3x.
S&P echoed a similar view while noting its base case forecast for spending in the upcoming auction was $10 billion which could push leverage to the 2.5x area (this number includes S&P’s adjustments). This 2.5x leverage ratio happens to be S&P’s threshold for an upgrade to single A. In order to be upgraded, leverage needs to not go much higher than 2.5x in 2021 and the company would need to prove its case for further deleveraging in 2022. While VZ remains committed to the dividend, share repurchases are the company’s fourth capital allocation priority. As such, VZ has not repurchased any shares since 2015. With the dividend consuming roughly $10.2 billion on a LTM basis, this leaves over $11 billion for debt reduction.
5G the Path Forward
VZ launched its nationwide 5G dynamic spectrum sharing (DSS) network in October with coverage in over 1,800 cities, covering more than 200 million of the US population. VZ also expanded its 5G Ultra-Wideband (UW) service to 55 cities, 43 stadiums and arenas and 7 airports. VZ plans to add 5 additional cities, bringing the total to 60 by year-end. The 5G UW service provides for download speeds that are 2x faster than 4G and can handle data volumes 100x larger than previous capabilities. Additionally, VZ noted that its 5G UW speeds are faster than wired broadband. In the age of COVID, with both work and education mostly remote, faster speeds can mean more productive employees and students, no matter the location. Furthermore, VZ will see a significant improvement in capital efficiency from a cost/MHz perspective as more people adopt 5G enabled phones such as the iPhone 12. That said, 5G will add to growth opportunities in 2021 and could further improve its cash flow generation.
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.
Copyright © 2023 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.