Verizon’s blockbuster $49bn (£31bn) bond issue came as the group is trying to buy a 45 per cent stake in its US mobile operator Verizon Wireless. The stake is owned by UK group Vodafone.
The group issued the dollar-denominated bonds at significant discounts to its existing debts, causing a major rush to participate on bond markets.
The firm received more than $100bn in subscriptions for the bonds and, due to demand, fulfilled all of its required raising from dollar denominated debt and postponed its planned debt sales in sterling and euro-denominated bonds.
Rich Smith, co-manager of the Aberdeen Strategic Bond fund, bought seven- and three-year bonds. Chris Bowie, head of credit at Ignis Asset Management, bought 10-year bonds and Euan McNeil, co-manager of the Kames Investment Grade Bond fund, bought 30-year debts.
The demand was so great that Verizon shelved plans for future issuance of euro and sterling-denominated bonds, and the bonds that were issued rallied sharply. The issue was the largest in history, totalling as much as the previous three biggest issues, from Apple, Roche and AbbVie, combined.
However, the three fund managers said they were all monitoring the markets last week as the bonds had rallied so sharply there was already a question over whether they had become expensive.
Mr Smith said the three-year bond delivered the fund’s annual target return in just one day, and he had already sold them on Thursday for a 2.3 per cent return, although he retained the seven-year bonds. The manager now has a 0.5 per cent position in the fund in Verizon.
Ignis’s Mr Bowie said he and his team had talked about selling their positions in the 10-year bonds last week given the strong capital gain, but will hold on to the bonds for now.
He said: “It’s not that we think there will be further capital gain, but we are happy to keep taking the coupon.”
However, Kames’s Mr McNeil said there could be further gains from the bonds because they are still trading at cheaper valuations than the existing Verizon debt.
Hold the phone: What fuelled the buying spree?
Verizon was so desperate to raise cash quickly for its planned purchase of Vodafone’s Verizon Wireless stake that it offered the debt at incredibly cheap prices.
In November 2012, it had issued 30-year debt at a spread of 97 basis points about US treasuries, but last Wednesday it offered its 30-year bonds at a spread of 265 basis points.
It’s no surprise then that the spread narrowed to 226 basis points in less than a day as investors snapped up the deal.
The surprising thing is the size of the demand. At $49bn, the debt issuance was the size of Uruguay’s annual GDP, but investors wanted more than double that, with subscriptions topping $100bn.
Chris Bowie at Ignis said it was a mystery where such a large sum of money was coming from and said there must have been equity or government bond-focused investors that got involved.
But Nick Hayes at AXA wondered whether the money may have come out of emerging market and high yield debt, and the next outflow figures from those markets could shed some light.
