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Credit Insights

AT&T Prices Third-Largest Corporate Bond Deal

The transaction is heavily oversubscribed.

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Earnings season has swung into full gear, but thus far very few surprises have emerged. The average spread of the Morningstar Corporate Bond Index rebounded from last week's widening and tightened 2 basis points to end the week at +130. The action was similar in the high-yield market as the Bank of America Merrill Lynch High Yield Index tightened 10 basis points to +456. Oil prices continued to recover, rising to a little over $57 a barrel from $56. As oil prices have generally risen since we noted in our Jan. 12 publication that oil prices had appeared to bottom out in the mid-$40s, the energy sector has outperformed the rest of the corporate bond market. In the investment-grade market, the average spread of the energy sector in the Morningstar Corporate Bond Index tightened 8 basis points to +181 last week and in the high-yield sector, energy tightened 11 basis points to +665. Since the end of last year, the energy sector has tightened a total of 53 basis points in investment grade and 91 basis points in high yield.

The new issue market re-emerged from its quiet-period-induced hibernation with a start, as AT&T (T) (rating: BBB, narrow moat) priced $17.5 billion worth of bonds among several different maturity tranches to fund its acquisition of DirecTV. This transaction is the third-largest corporate bond deal behind Verizon's (VZ) (rating: BBB, narrow moat) $49 billion megadeal in September 2013 and Actavis' (ACT) (rating: BBB-, wide moat) $21 billion deal in March. We thought initial whisper talk on the notes was especially cheap, and considering how much the price talk was driven tighter when the deal was priced, we were not alone. Reportedly, the offering was almost 4 times oversubscribed as there was more than $65 billion worth of orders for the transaction. The company has been on a bit of a shopping spree; it reported $19.5 billion of acquisitions in the first quarter, with $2.5 billion to fund the acquisition of a Mexican wireless operator and the remaining $17 billion to fund the balance of the wireless spectrum bill. AT&T ended the first quarter with net leverage of 2.3 times, compared with 1.8 times at the end of 2014. If the DirecTV acquisition is completed by year-end, using our forward EBITDA estimates for both companies, we estimate that the pro forma net leverage of the combined company would be around 2.5 times.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.