The "Great Rotation" Into Verizon: Where Did The Money Come From?
Yesterday's record Verizon bond offering, which to some had an eerie sense of deja vu to the TXU 2007 mega-LBO just before the market blew up, caught many by surprise: not only did the underwriters have no problem obtaining over $100 billion in orders to oversubscribe demand for the $49 billion offering, but following the break the bond immediately proceeded to trade a whopping 40-70 bps tighter implying yield pricing could have been done well lower, but the CDS also ripped 11bps tighter. Because nothing says less default risk like $49 billion more in debt. But where did all this demand come from? Did accounts simply have $100 billion in cash lying around? The answer is no, and as the following breakdown of the post-break action in VZ from Deutsche demonstrates, what happened yesterday was a great rotation into the NSA-favorite company and the Telecom space in general, and out of virtually every other credit in the market.
From DB's Jim Reid
Yesterday was certainly a day for the record books with Verizon pricing $49bn in bonds (the largest ever bond deal by some way) to finance its $130bn purchase of a 45% stake in Verizon Wireless (the third-largest M&A deal in history). Just to put this in perspective, the $49bn issue size is bigger than the three previous record-sized deals combined. They were Apple's $17bn deal in April, AbbVie's US14.7bn last November and Roche Holdings' $13.5bn transaction in 2009. According to Reuters, it’s also larger than the GDP of some 90 countries, putting aside the stock vs. flow issues of such a comparison. The eight-tranche deal also managed to break the record for the largest 3yr, 5yr, 7yr, 10yr and 30yr fixed rate tranches. In terms of fees, Bloomberg reports that a total of $265m in bond underwriting fees were paid to underwriters.
A frenetic start to secondary trading saw the new Verizon bonds trade between 40-70bp tighter on the break with investors lured by the high-all-in yields on some of the longer-dated tranches. Yields were above 5% on the 10yr and above 6% on the 30yr tranche. The bonds ended up settling around 30-40bp tighter on the day with some profit-taking towards the end of the first trading session. The 10yr bonds are quoted this morning at around T+190bp from an issue spread of T+225bp while the 30yr bonds are marked at T+220bp versus a new issue level of T+265bp. Verizon’s 5yr CDS also ratcheted 11bp tighter on the day as loan hedgers and investors covered their remaining short positions.
According to TFLO data from Bloomberg it was clear that clients were net buyers of Telecom credits but net sellers of most of the other sectors across the IG space. Indeed taking a closer look at the data by sectors, the Buy/Sell ratio (by dollar amount) for dealers were 80% in Communications, but 178%, 165%, 156%, and 148% for Utilities, Industrials, Materials, and Consumer Staples, respectively. So overall it appears that clients were rotating out from other segments across the DM IG corporate space to make way for the record-breaking Verizon deal. This was also reflected in Telecom sector outperformance on the day. The iBoxx $ Domestic Telecommunications index’s benchmark spread finished the day 6bp tighter, whereas Utilities, Oil & Gas, Health Care and Industrials were anywhere between 2bp-4bp wider.
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