AT&T disclosed that it has obtained a $40 billion term loan credit agreement from J.P. Morgan and Bank of America Merrill Lynch in connection with its planned $85.4 billion acquisition of Time Warner.
Pricing on the bridge loan is tied to a ratings-based grid, at L+75–150. Based on AT&T’s BBB+/Baa1 rating, pricing would appear to open at L+112.5.
The bridge loan is covered by a net debt leverage covenant set at 3.5x.
In addition to new debt, the acquisition will be funded with cash on AT&T’s balance sheet.
Bonds backing AT&T and Time Warner Inc. widened on Friday as participants anticipated the formal merger announcement. AT&T 4.75% bonds (BBB+/Baa1) due May 15, 2046, which date to issuance in April 2015 at T+215, changed hands 25–30 bps wider at G-Spreads in the low-to-mid 220 bps range, and continued trade in that area this morning, according to MarketAxess.
Time Warner 4.85% bonds (BBB/Baa2) due July 15, 2045—which were first printed in May 2015 at T+195, and reopened last November at T+200, or 5.06%—traded on Friday at G-Spreads in the low 200 bps area, or 20 bps wider on the day and month to month, and were indicated in that area again this morning, trade data show.
AT&T’s market capitalization was recently roughly $238 billion and its total enterprise value roughly $362 billion, including $7.3 billion of cash and $131 billion of total debt, according to S&P Global Market Intelligence. Time Warner had a $64.5 billion market cap and $86.5 billion total enterprise value, including $2.5 billion of cash and short-term investments and $24.5 billion of total debt.
While bond spreads widened, CDS indications went in different directions. AT&T five-year protection costs on Friday increased 7% to the 95-bps area, and continued up this morning to test 100 bps, while Time Warner costs ebbed 9% to just under 60 bps on Friday and continued a further 0.5 bps tighter this morning.
The acquisition is expected to close before year-end 2017. By the end of the first year after closing, AT&T expects net leverage to be in the 2.5x range.
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