21 January 2020

AT&T & Comcast Two Most Indebted Companies

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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 both deals are finalized—AT&T has bought Time Warner Inc. and Comcast hopes 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 Moody’s research. 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. Comcast’s offer for Fox at $35 per share puts it in a bidding war withWalt Disney Co. DIS -1.64% , which is bidding $29.54 per share to buy Fox.

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 both 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.

From AT&T and Time Warner to the hot pursuit of 21st Century Fox and Sky, media mergers are in full swing. Why now? WSJ's Amol Sharma answers all your questions about the forces driving media deals. Photo: Getty Images

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 with 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 will have about $181 billion of debt because of the Time Warner purchase 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.

Click here for the original article from The Wall Street Journal.

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