Sooner the better for US$60bn Verizon Wireless acquisition financing

* Rising rates means time is of the essence for refinancing

* Bridge loans likely to be taken out by bonds and loans

* Initial up to US$10bn bond refinancing on the cards

By Danielle Robinson, Michelle Sierra and Tessa Walsh

LONDON, Aug 30 (IFR) - The ability of debt markets to absorb as much as US$60bn of acquisition debt from one company will be tested if Verizon Communications is successful in its talks with Vodafone Group and buys a 45% stake in Verizon Wireless.

Vodafone (LSE: VOD.L - news) confirmed on Thursday that it was in advanced talks with Verizon (NYSE: VZ - news) , which already owns 55% of the wireless concern, fuelling speculation that a deal could be announced as early as the week ahead.

The price tag for buying Vodafone's 45% stake in the wireless cash-cow could be as high as US$130bn, which would make it the third-biggest acquisition deal ever.

Expectations are that about US$60bn of that will have to be financed in the debt markets, initially in the form of bridge loans - creating the biggest acquisition financing the loan market has ever seen.

The bridge loans are expected to be refinanced in the into a longer-term capital structure. The majority of the refinancing is likely to be done in the bond markets, but loans will also be included.

RISING RATES

With Vodafone and Verizon dithering about price for months, market specialists believe the deal is being pushed over the line because those involved worry that the debt markets are on the brink of yet another bout of rate volatility which would make the financing much harder.

Some Wall Street firms are forecasting that 10-year US Treasury rates will surge to over 3.00% before Christmas, as the Federal Reserve gets closer to tapering its bond buying programme. This time next year, that 10-year rate could be as high as 3.75%, say some.

Danish Agboatwala, telecoms strategist at Barclays (LSE: BARC.L - news) , said rising rates had "significant implications for a potential Verizon buy-in of Verizon Wireless".

"While financing is still viable under current rates  we expect the odds of a potential transaction to start diminishing over the next several months, as we are hard pressed to see a better set of conditions for a transaction."

If the debt financing is about US$60bn, each 100bp increase in rates could potentially add about US$600m a year in interest costs to the financing.

While there doesn't seem to be any indication that Verizon would struggle to get the US$60bn commitment from lenders, the deal would come on top of more than US$10bn of acquisition-related three and five-year term loans for Amgen (Xetra: 867900 - news) and Actavis (NYSE: ACT - news) in recent months.

COMING TO TERMS

Term loans have been taking up increasing amounts of permanent acquisition financing packages for companies in high cashflow generating sectors to cater for banks' increased appetite for funded debt.

Acquiring companies look for the most flexible, penalty-free way of reducing acquisition debt with the new free cashflow they generate from their acquisitions. Loans can be paid back any time, but bonds have pre-payment penalties attached.

In this instance, Verizon would have the option to use the new cashflow to repay loans contained in the termed-out debt quickly and without penalty, something which makes including term loans particularly attractive.

Amgen, which has a tainted image in the bond market after shareholder-friendly debt raisings in recent years, has decided skip the bond market altogether and has announced US$8.1bn of committed five-year loan facilities to pay the bulk of the net US$9.7bn acquisition of Onyx Pharmaceuticals (NasdaqGS: ONXX - news) .

"It will be fascinating to see how the term-loan market reacts to all of this supply," said one banker in the US. "It will be interesting to see what capacity is left for future acquisitions after all of this volume."

Agboatwala predicts that a Verizon deal involving US$60bn of debt would take a final form (after the initial bridge loans are refinanced) of about US$20bn of US dollar bonds, US$5bn-$10bn-equivalent of other currency notes, with the balance raised via loans and other financing markets.

TIME IS OF THE ESSENCE

With time of the essence, Verizon could hit the US dollar bond market for as much as US$10bn in one day, and as early as October, said bankers.

"If Verizon announces a deal with Vodafone next week, then they can immediately get their pro forma financings in place and then come to the market after their earnings announcement in late October," said one debt capital markets head. Verizon's earnings are scheduled for release on October 17.

Getting to market sooner rather than later is all the more pertinent for a borrower with large needs.

Apart from rising funding costs, a volatile rate environment can shrink the amount of orders investors will put in for a new deal.

In the past month, bond investors have been hinting to bond syndicate managers that, if rates become more volatile, they'll reduce their orders in new issues and pick up cheaper bonds in the secondary market instead.

Investors learnt the hard way in late April, when they bought the 10 and 30-year tranches of Apple (NasdaqGS: AAPL - news) 's record US$17bn bond issue at razor-thin spreads, that the better strategy would have been to only invest in the short-dated tranches and pick up the longer-dated bonds when they plunged in price just weeks after issue when rates spiked.

OVERHANG

Getting as much as possible of an acquisition's permanent financing in place in the bond market in one fell swoop is also advisable to reduce the extra spread bond investors demand if they think more deals from the same issuer are in the queue.

"Verizon will have an overhang issue, without question," said a DCM (KSE: 024090.KS - news) head. "But if they can show people that with 100% of Verizon Wireless they can generate a tremendous amount of cashflow, and if they offer a good new-issue concession, then I think investors would be all over a US$10bn deal."

Like Apple, Verizon could allay concerns about more bond issues coming down the pipe by getting a mega deal under its belt early and then being vague about how much of its remaining needs will be taken care of with free cash.

Verizon is expected to suffer a one-notch downgrade to Triple B-plus if it takes on US$60bn more in debt.

A US$60bn financing would send Verizon's pro forma net leverage soaring to 2.4 times, from a current level of 1.7 times, according to Agboatwala.

"Given significant free cashflow generation, we anticipate Verizon returning to current 1.7 times net leverage in approximately three to four years - and a return to Single A ratings," Agboatwala said. (Editing by Matthew Davies)