Verizon’s $130 billion acquisition of Vodafone’s Verizon Wireless stake last week marked the biggest deal in communications history. What’s even more interesting is the biggest bond financing in corporate history: Verizon sold $49 billion in debt yesterday to pay for the deal.
What to think of the deal? It’s cynical financial engineering. It’s dangerous. But it makes a lot of sense for Verizon. And it should scare everybody about the potential ramifications of the unintended consequences of the Federal Reserve’s artificially low interest rates.
Verizon was clearly taking advantage of a low-rate environment to lock in cheap debt, selling $49 billion of bonds yesterday, issuing a mixture of bonds ranging from 3 years to 30 years in maturity. Interest rates on the debt ranged from 5.15% notes due in 2023 to 6.55% on debt due in 2043. In bond parlance, the spread on the rates over treasury rates was generally around 1.5%-2%.
Now, 2043 — that’s hilarious. What kind of iPhone will be sold in 2043, I wonder?
It’s by far the largest corporate debt issuance in history, dwarfing Apple’s mere $17 billion in corporate debt issues in April.
Bloomberg reports that investors made billions on the 30-year notes as demand was high, pushing up the prices far above the issue price.
I’m a simple man, and to me, debt bubbles are dangerous. Telecommunications companies are famous for creating outsized debt loads. Debt is what nearly wiped out the industry in 2000/2001. Verizon’s balance sheet was already debt heavy, with about $47 billion in debt prior to the deal.
Concern about Verizon’s huge debt load has led the leading ratings agencies, including Moody’s and S&P, to downgrade the company’s credit rating to BBB+. Many of the newer bonds were rated BBB.
CreditSights, a credit research firm, says Verizon will use new cash flow to deleverage the debt once it’s on the balance sheet.
I’ve seen some entertaining blog posts that say this somehow indicates the economy is strong and that the new Verizon debt will be a boon to the economy. That’s funny. Do you think Verizon use all this new money to innovate and generate massive amounts of jobs? No. It’s more likely, as CreditSigths says, to stash it on the balance sheet, so that later, when rates rise, they can use it to pay down other debt.
The debt capital will not be used to create innovation, or new products, or jobs. It’s being used to refinance other instruments of finance. That’s the new world we live in, where interest rates are determined by government bankers in Washington D.C. — and the financial alchemists on Wall Street.
Historically, deals like this have warned of dangerous high-water marks.