Mergers to Make AT&T, Comcast World's Most Indebted Companies
June 18 2018 - 5:59AM
Dow Jones News
By Matt Wirz
A wave of expected major-media mergers would transform AT&T
Inc. and Comcast Corp. into the two most indebted companies in the
world, a standing that carries uncharted risks for investors in the
firms' bonds.
If the deals are finalized -- AT&T plans to buy Time Warner
Inc. and Comcast to purchase 21st Century Fox Inc. -- the companies
will carry a combined $350 billion of bonds and loans, according to
data from Dealogic and Moody's Investors Service. The purchases are
meant to provide additional income to help the acquirers to weather
turmoil sweeping their industries. But if the mergers falter, the
record debt loads will give AT&T and Comcast little margin for
error, fund managers and credit ratings analysts say.
"It's a very big number," said Mike Collins, a bond fund manager
at PGIM Fixed Income, which manages $329 billion of corporate debt
investments. "It has fixed-income investors a little nervous and
rightfully so."
The debt-fueled buyouts by AT&T and Comcast are extreme
examples of a decadelong surge in corporate borrowing that is
stoking investor anxieties about what will happen as the economy
slows and global interest rates rise. The ratio of debt to
corporate earnings, commonly called leverage, has also risen,
giving companies less financial cushion to absorb market
shocks.
Global corporate debt excluding financial institutions now
stands at $11 trillion and the median leverage for such companies
rated investment-grade has jumped 30% since the eve of the
financial crisis in 2007, according to research by ratings firm
Moody's Investors Service. Most companies issue new loans and bonds
to repay debt and investors are concerned about how companies will
refinance their record-breaking debt loads when capital markets
experience their next significant downturn.
Officials at AT&T and Comcast say the refinancing risk from
their post-deal debt would be minimal because they plan to quickly
repay much of the debt with cash generated from the combined
businesses. AT&T, for example, is expected to produce $8
billion to $10 billion of free cash flow that could be applied to
debt reduction, analysts say. It is also common for telecom
companies to carry high debt because they invest heavily in their
networks and their customers provide them with reliable
revenue.
AT&T's and Comcast's other motives for borrowing are fairly
typical. Both companies are grappling with slowing growth and
increased competition caused by technological change and they rely
heavily on stock dividends and repurchases to satisfy
shareholders.
Many corporations facing similar headwinds responded by raising
debt in recent years, an easy choice given low borrowing rates
created by ultraloose central bank policies across the globe.
Still, the scale of debt AT&T and Comcast would carry if
their purchases succeed is unprecedented and debt investors are
scrambling to analyze the consequences.
"We are getting a lot of calls," says Allyn Arden a telecom and
cable analyst at S&P Global Ratings. S&P and Moody's cut
their ratings on AT&T bonds Friday to a level two notches above
the junk-debt category.
The cut, and an anticipated downgrade of Comcast, are expected
to lower the average ratings of most investment-grade corporate
bond portfolios because AT&T and Comcast are such large
components of the benchmark indexes tracked by investment firms.
Should AT&T complete its acquisition of Time Warner, it would
comprise at least 1.93% of the widely followed Bloomberg Barclays
U.S. IG corporate bond index compared to about 1.59% currently. A
combination of Comcast and Fox would make up at least 1.38% of the
index, up from Comcast's current 1.04% quotient.
If the two companies repay debt used for the acquisitions as
planned, they could quickly return to their pre-deal credit
ratings. Conversely, if the forecast benefits of the mergers don't
materialize or if technological disruptions shrink revenues,
ratings firms could make further downgrades.
AT&T would have about $181 billion of debt after it
purchases Time Warner but other liabilities, including operating
leases and postretirement obligations, amount to about $50 billion,
Mr. Arden says. As a result, S&P estimates the company's
post-deal leverage at about 3.5 times earnings before interest,
taxes, depreciation and amortization, or Ebitda. That is slightly
below the 3.75 times leverage that S&P views as typical for
comparable telecommunications companies rated triple-B-minus, the
lowest investment grade rating.
AT&T calculates its leverage at 2.9 times Ebitda, but
doesn't include leases or postretirement obligations in the figure.
The telecommunications firm forecasts returning to 2.5 times within
four years, a person familiar with the company said.
Should additional rating cuts put the company on the edge of
junk-debt category, fund managers who are prohibited from holding
debt rated below investment grade might start to sell its bonds
pre-emptively.
"The risk is that everyone wants to get out of the debt at the
same time, " Mr. Collins said. "That's when it gets ugly." When oil
prices plummeted in 2015, for example, the debt of some energy
pipeline companies with low investment-grade credit ratings fell
15% in a matter of months.
Gene Tannuzzo, portfolio manager of a $4.3 billion debt fund for
Columbia Threadneedle Investments, has halved his exposure to bonds
of telecommunications and media companies over the past year
because of their rising debt and headwinds facing the industries.
He has sold out of Comcast bonds entirely but would consider
purchasing debt backing the Fox purchase if it paid a high enough
yield, he said.
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
June 18, 2018 05:44 ET (09:44 GMT)
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