T-Mobile deal on horizon; high-grade fixed income fund flows soften; telecom bonds widen

By Cristal Cody

Tupelo, Miss., Jan. 3 – Investment-grade supply remained quiet on Friday with deal volume expected to likely resume in the first full week of 2020.

January supply is pegged to total in the $115 billion to $125 billion area, according to syndicate sources.

Merger and acquisition deals are in the forefront with investors particularly awaiting the outcome of regulatory approval of T-Mobile U.S. Inc.’s acquisition of Sprint Corp.

The Federal Communications Commission approved the deal in 2019, but the company faces additional regulatory hurdles, including lawsuits filed on behalf of attorneys general to stop the merger.

A potential investment-grade senior secured bond offering from T-Mobile to fund the acquisition is forecasted in the $19 billion area based on the company’s senior bridge financing, a market source said.

T-Mobile held a fixed income investor roadshow in the U.S. and Europe markets in 2019 from April 30 through May 8 via Barclays, Deutsche Bank Securities Inc. and Goldman Sachs & Co. LLC.

The deal size may be larger with an estimate of about $23 billion of supply to refinance outstanding high-yield debt, term loans and revolvers, according to management commentaries on the company’s second earnings call in 2019, BofA Securities Inc. analysts said in a global research note released on Friday.

The deal timing remains uncertain and is also subject to approval from California’s regulatory commission, but T-Mobile does intend to prefund the merger prior to closing, according to the note.

Other deals in the foreseeable horizon that may be in the high-grade pipeline include Novartis International AG, which announced in November that it will acquire The Medicines Co. in a transaction set to close in the first quarter of 2020. The deal is valued at $7.4 billion.

Novartis said it plans to finance the merger through available cash and short- and long-term borrowings.

Fund flows weaken

Meanwhile, investment-grade inflows softened over the past holiday-shortened week.

Inflows to all U.S. fixed income funds and ETFs weakened to $3.21 billion for the week ended Wednesday from $6.42 billion in the previous week, Yunyi Zhang, a credit strategist with BofA Securities, said in a global research note.

The drop was driven by a decline in investment-grade inflows, including corporates, agencies, Treasuries and mortgages, to $2.57 billion this past week from $4.81 billion a week earlier.

The short-term investment-grade space suffered $200 million in outflows after gaining $930 million in inflows in the previous week, while high-grade inflows, excluding short-term, slowed to $2.77 billion from $3.88 billion for the week ended Dec. 25.

Inflows to investment-grade funds also declined to $690 million this past week from $5.55 billion in the prior week, which was partially offset by a $1.89 billion inflow to high-grade ETFs following a $740 million outflow the week before, Zhang said.

Lipper US Fund Flows reported on Thursday that corporate investment-grade funds had outflows of $573 million for the past week following inflows of $5.16 billion in the week ended Dec. 25.

Credit spreads ease

Credit spreads also softened on Friday.

The Markit CDX North American Investment Grade 33 index eased more than 1 basis point during the session to close at a spread of 45.9 bps.

Earlier on Friday, the Federal Reserve released the minutes from its Dec. 10-11 monetary policy meeting.

“Despite the euphoria in the financial markets as the New Year trading began yesterday, it’s important to remember there are not just geopolitical risks, but also some lingering economic risks to keep in mind,” Confluence Investment Management credit strategists said in a report early Friday. “For example, it’s still possible that the Fed’s interest-rate cuts last year may have come too late. Separately, the Philadelphia Federal Reserve has issued a report noting that nine states are expected to be in recession in 2020, including Pennsylvania, New Jersey, Delaware, West Virginia, and Iowa.”

Secondary trading

In secondary trading on Friday, investment-grade bonds were mixed.

Steel Dynamics, Inc.’s 3.45% notes due April 15, 2030 were mostly unchanged but remain more than 60 bps tighter than where the issue priced in December.

In the telecommunications sector, AT&T Inc.’s 4.35% notes due March 1, 2029 softened nearly 5 bps on Friday.

Verizon Communications Inc.’s 3.875% green senior notes due Feb. 8, 2029 widened more than 8 bps during the session.

Charter Communications, Inc.’s 4.8% senior secured notes due March 1, 2050 that were reopened in December traded about 5 bps weaker on the day.

Steel Dynamics steady

Steel Dynamics’ 3.45% senior notes due April 15, 2030 (Baa3/BBB-/BBB) were mostly unchanged in the secondary market on Friday at 102 bps bid, according to a market source.

Steel Dynamics sold $600 million of the notes on Dec. 9 at a Treasuries plus 165 bps spread.

The steel producer and metals recycler is based in Fort Wayne, Ind.

AT&T notes ease

AT&T’s 4.35% notes due March 1, 2029 traded nearly 5 bps wider on Friday at 115.5 bps bid, a market source said.

AT&T sold $3 billion of the bonds on Feb. 13, 2019 at a spread of Treasuries plus 170 bps.

The telecommunications company is based in Dallas.

Verizon softens

Verizon Communications’ 3.875% green senior notes due Feb. 8, 2029 headed out more than 8 bps wider in secondary trading on Friday at 80 bps bid, according to a market source.

Verizon sold $1 billion of the notes (Baa1/BBB+/A-) on Feb. 5, 2019 at a spread of Treasuries plus 120 bps.

The telecommunications company is based in New York City.

Charter widens

Charter Communications’ 4.8% senior secured notes due March 1, 2050 (Ba1/BBB-/BBB-) eased about 5 bps during Friday’s session to trade in the 223 bps bid area, according to a market source.

Charter reopened the notes on Dec. 2 in a $1.3 billion add-on at 101.964 to yield 4.677%, or a spread of Treasuries plus 240 bps.

The notes were issued through subsidiaries Charter Communications Operating, LLC and Charter Communications Operating Capital Corp.

Charter originally sold the notes in a $1.5 billion offering on Oct. 15 at 99.436 to yield 4.836% and a spread of Treasuries plus 260 bps. The total outstanding is $2.8 billion.

The broadband communications company is based in Stamford, Conn.

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