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* 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 absorbas much as US$60bn of acquisition debt from one company will betested if Verizon Communications is successful in its talks withVodafone Group and buys a 45% stake in Verizon Wireless.
Vodafone confirmed on Thursday that it was in advanced talkswith Verizon, which already owns 55% of the wireless concern,fuelling speculation that a deal could be announced as early asthe week ahead.
The price tag for buying Vodafone's 45% stake in thewireless cash-cow could be as high as US$130bn, which would makeit the third-biggest acquisition deal ever.
Expectations are that about US$60bn of that will have to befinanced in the debt markets, initially in the form of bridgeloans - creating the biggest acquisition financing the loanmarket has ever seen.
The bridge loans are expected to be refinanced in the into alonger-term capital structure. The majority of the refinancingis likely to be done in the bond markets, but loans will also beincluded.
RISING RATES
With Vodafone and Verizon dithering about price for months,market specialists believe the deal is being pushed over theline because those involved worry that the debt markets are onthe brink of yet another bout of rate volatility which wouldmake the financing much harder.
Some Wall Street firms are forecasting that 10-year USTreasury rates will surge to over 3.00% before Christmas, as theFederal Reserve gets closer to tapering its bond buyingprogramme. This time next year, that 10-year rate could be ashigh as 3.75%, say some.
Danish Agboatwala, telecoms strategist at Barclays, saidrising rates had "significant implications for a potentialVerizon buy-in of Verizon Wireless".
"While financing is still viable under current rates weexpect the odds of a potential transaction to start diminishingover the next several months, as we are hard pressed to see abetter set of conditions for a transaction."
If the debt financing is about US$60bn, each 100bp increasein rates could potentially add about US$600m a year in interestcosts to the financing.
While there doesn't seem to be any indication that Verizonwould struggle to get the US$60bn commitment from lenders, thedeal would come on top of more than US$10bn ofacquisition-related three and five-year term loans for Amgen andActavis in recent months.
COMING TO TERMS
Term loans have been taking up increasing amounts ofpermanent acquisition financing packages for companies in highcashflow generating sectors to cater for banks' increasedappetite for funded debt.
Acquiring companies look for the most flexible, penalty-freeway of reducing acquisition debt with the new free cashflow theygenerate from their acquisitions. Loans can be paid back anytime, but bonds have pre-payment penalties attached.
In this instance, Verizon would have the option to use thenew cashflow to repay loans contained in the termed-out debtquickly and without penalty, something which makes includingterm loans particularly attractive.
Amgen, which has a tainted image in the bond market aftershareholder-friendly debt raisings in recent years, has decidedskip the bond market altogether and has announced US$8.1bn ofcommitted five-year loan facilities to pay the bulk of the netUS$9.7bn acquisition of Onyx Pharmaceuticals.
"It will be fascinating to see how the term-loan marketreacts to all of this supply," said one banker in the US. "Itwill be interesting to see what capacity is left for futureacquisitions after all of this volume."
Agboatwala predicts that a Verizon deal involving US$60bn ofdebt would take a final form (after the initial bridge loans arerefinanced) of about US$20bn of US dollar bonds,US$5bn-$10bn-equivalent of other currency notes, with thebalance raised via loans and other financing markets.
TIME IS OF THE ESSENCE
With time of the essence, Verizon could hit the US dollarbond market for as much as US$10bn in one day, and as early asOctober, said bankers.
"If Verizon announces a deal with Vodafone next week, thenthey can immediately get their pro forma financings in place andthen come to the market after their earnings announcement inlate October," said one debt capital markets head. Verizon'searnings are scheduled for release on October 17.
Getting to market sooner rather than later is all the morepertinent for a borrower with large needs.
Apart from rising funding costs, a volatile rate environmentcan shrink the amount of orders investors will put in for a newdeal.
In the past month, bond investors have been hinting to bondsyndicate managers that, if rates become more volatile, they'llreduce their orders in new issues and pick up cheaper bonds inthe secondary market instead.
Investors learnt the hard way in late April, when theybought the 10 and 30-year tranches of Apple's record US$17bnbond issue at razor-thin spreads, that the better strategy wouldhave been to only invest in the short-dated tranches and pick upthe longer-dated bonds when they plunged in price just weeksafter issue when rates spiked.
OVERHANG
Getting as much as possible of an acquisition's permanentfinancing in place in the bond market in one fell swoop is alsoadvisable to reduce the extra spread bond investors demand ifthey think more deals from the same issuer are in the queue.
"Verizon will have an overhang issue, without question,"said a DCM head. "But if they can show people that with 100% ofVerizon Wireless they can generate a tremendous amount ofcashflow, and if they offer a good new-issue concession, then Ithink investors would be all over a US$10bn deal."
Like Apple, Verizon could allay concerns about more bondissues coming down the pipe by getting a mega deal under itsbelt early and then being vague about how much of its remainingneeds will be taken care of with free cash.
Verizon is expected to suffer a one-notch downgrade toTriple B-plus if it takes on US$60bn more in debt.
A US$60bn financing would send Verizon's pro forma netleverage soaring to 2.4 times, from a current level of 1.7times, according to Agboatwala.
"Given significant free cashflow generation, we anticipateVerizon returning to current 1.7 times net leverage inapproximately three to four years - and a return to Single Aratings," Agboatwala said. (Editing by Matthew Davies)
