Mega-mashup: Discovery clears $30 billion bond to fund WarnerMedia deal, bullish sign for shaken market
Debt-driven corporate mega-mashups are back.
Investors piled into Discovery Inc.’s DISCA,
On Wednesday, a $30 billion investment-grade corporate bond deal to fund its mashup with AT&T’s T,
WarnerMedia a bullish sign for markets reeling from Russia’s invasion of Ukraine.
Order books on the 11-part bond deal are reported to have reached $106 billion, or nearly 3.5 times available bonds, despite its large size and recent volatility caused by the worsening crisis in Ukraine.
To see: Credit markets remain cautiously open to U.S. companies as Russian-Ukrainian war escalates
“It certainly has to do with the tone of risk with the decline in oil prices,” Tom Murphy, head of investment grade credit at Columbia Threadneedle Investments, said in a phone call.
“We have eight deals tomorrow, so we can start the process all over again,” Murphy said of the new show pipeline. But he also said it’s a positive market signal when a mega-deal is struck in a year when total returns have fallen sharply.
Goldman Sachs pegged total returns for the US investment-grade bond market at minus-5.9% for the year, through last week, versus -4.2% for the US high-yield bond sector.
Investors also withdrew $5.4 billion from investment-grade U.S. bonds and exchange-traded funds last week, the largest outflows since the March 2020 liquidity crunch, according to BofA Global.
The tone changed on Wednesday, however, with global oil BRN00,
prices fell 13%, a day after the Biden administration banned imports of Russian oil and related energy products. Stocks also rallied globally as the historic run-up in commodity prices eased, helping the S&P 500 SPX,
records its best day since June 2020.
Tied for 4th largest debt contract
Verizon Communications Inc. VZ,
still holds the top spot for the largest U.S. investment-grade bond deal, with its nearly $50 billion in funding in 2013 on the heels of the ‘tantrum’ triggered by the Federal Reserve’s plans to start to reduce its balance sheet following the 2008 crisis. global financial crisis.
Close behind was the $46 billion bond for Anheuser-Bush InBev BUD,
funding in 2016, followed by nearly $40 billion in funding for CVS Health Corp. CVS,
in 2018 and the approximately $30 billion of AbbVie Inc. ABBV,
trade in 2019, according to Dealogic data.
The financing of the AT&T and Discovery deal, tied with AbbVie, now ranks fourth among its kind in history. The deal was announced last May, in part to allow AT&T to focus on its wireless business, including an expensive 5G build.
To see: AT&T’s $43 billion deal with Discovery will help it cut debt ahead of costly 5G build
Initial levels of 2-year AT&T and Discovery bonds, rated BBB-, were within a range of 190 basis points against TMUBMUSD10Y Treasuries,
while the longest 40-year class started closer to 325 basis points above the risk-free benchmark, according to CreditSights.
The spread, where premium investors earn above Treasuries, has tightened by around 15 to 25 basis points from initial price thinking, according to Informa Global Markets. Murphy said corporate bond spreads narrowed by about 25 basis points in 2013, in the months following Verizon’s giant bond deal, despite lingering taper tantrum shocks.
“Now we have the Russian invasion, concerns about Fed rate hikes and concerns about inflation,” he said.
AT&T returned a request for comment to Discovery, which led the funding. Discovery did not immediately respond to a request for comment.