UPDATE 3-Verizon breaks record books with $49 billion bond

Reuters

(Corrects Moody's rating to Baa1 from Baa2 in 15th paragraph)

* Pricing too good to turn down, 45bp spread tightening

* 3000 orders worth over $100 billion from 1,200 investors

* $240-249m estimated fee payday for underwriters

By Danielle Robinson

NEW YORK/LONDON, Sept 11 (IFR) - Verizon Communicationspriced a $49 billion eight-tranche deal on Wednesday, a recordsize for a corporate bond, sold at giveaway prices to lock inpermanent financing for its $130 billion buyout of VerizonWireless.

Anxious to complete the entire bond portion of its acquisition financing before a crucial Federal Open MarketCommittee meeting next week, Verizon decided to scrap $5bilion-$10 billion of issuance in euros and sterling initiallyplanned for next week do the entire amount in dollars.

At $49 billion, the deal is bigger than the three previousrecord-sized deals combined: Apple's $17 billion deal in April,AbbVie's US14.7 billion last November and Roche Holdings' $13.5billion transaction in 2009. It is also larger than the GDP ofsome 90 countries.

In addition, Verizon also now holds the record for thelargest three-year, five-year, seven-year, 10-year, 20-year and30-year fixed rate tranches, according to Thomson Reuters/SDCdata.

Sources with knowledge of the deal said Verizon and its keyunderwriters, Bank of America Merrill Lynch, Barclays, JP Morganand Morgan Stanley, were shocked at the size of the order bookthat emerged by Tuesday afternoon.

The total bond underwriting fees Verizon paid were alsosubstantial, estimated at between $240-249 million by ThomsonReuters/Freeman Consulting.

Some of the fee bonanza was also shared with severalso-called passsive bookrunners, Citi, Credit Suisse, Mizuho,Royal Bank of Canada, Royal Bank of Scotland and Wells Fargo.

The $49 billion, along with about $12 billion of term loans,will completely refinance the $61 billion one-year bridge loanput in place last week to cover the debt portion of Verizonacquisition of Vodafone's 45% holding in Verizon Wireless.

Acquisition financing is often structured where banks willprovide the acquirer with short-term loans to provide a bridgebetween making a bid on an asset and then putting permanentfinancing in place in the form of bonds and term loans.

AS QUICKLY AS POSSIBLE

"Verizon had a preference to take out as much as they could,as quickly as they could, in maturities that were as long aspossible," said one source involved in the deal.

"And once they signaled to the maket that they were out forsize and were not going to play the usual game of pulling in thespread as orders came in the book, investors were willing tocome into the deal in size."

More than 3000 orders worth more than $100 billion poured infrom more than 1,200 investors as a result of new issueconcessions greater than 50bp on the fixed rate tranches. Thiswas in addition to the 50bp spread widening seen in the lastfortnight on outstanding Verizon bonds, in anticipation of thenew deal.

Another source close to the deal said there was at least oneorder that exceeded $5 billion. Another source, not involved inthe deal, said there was one order of $7 billion from oneinvestor.

"The investor base viewed this as an opportunity to getexposure to a name with the cash flow and debt reductiontrajectory to return to a single A rating in a few years," thesource added.

Verizon is rated Baa1/BBB+/A- by Moody's, S&P and Fitch.

BARGAIN PRICES

The bargain basement pricing was made obvious when thelonger-dated tranches snapped in as much as 45bp as soon as theywere free to trade. The three-year fixed rate tranche wastrading 65bp tighter than its launch spread.

"This deal has done very well but it was no secret the dealwas priced very cheaply in order to accommodate the massiveamount of size the company wanted to print," said Frank Reda,head of trading at Taplin, Canida and Habacht.

Tightening of 20bp is rarely seen in the investment grademarket, let alone more than 40bp.

Yet investors considered the deal to have been appropriatelypriced, given its size, and the bigger risk Verizon faced if itdidn't get all of its bond issued at once.

"This amount of tightening is very uncommon but this amountof debt issuance is also very uncommon," said Reda.

"It was better for the company to pay a little extra andmake sure that they complete all the funding they needed ratherthan risk the deal going poorly and them having to come back tomarket at a later date."

Verizon was left in no doubt by the bond underwriters thatits spreads could widen out 40-50bp on the news of a $20billion-plus transaction, as well as the fact that, given thevolatile markets of late, that it might have to offer a further50bp as new issue concession.

It was not just the pricing that made the deal too good torefuse. Investors who benchmark themselves to bond indices wereforced to take part simply because of the impact the size of thedeal will have on the make up of indexes they measure theirperformance against.

"With an offering of this magnitude, some portfolio managerswho measure their performance against a benchmark might considerthemselves as taking on a certain degree of basis risk by notparticipating in this deal," said portfolio manager Bonnie Baha,who heads global developed credit at DoubleLine.

Its average coupon on the tranches was 3.59%, and with the10, 20 and 30-year coupons ranging from 5.15% to 6.55%, the dealeven attracted junk bond investors.

"Many people looked at the 5.2% expected coupon on the10-year bond and realized that this is a blue-chip borrowerthat's offering more than some double-B names," said MikeCollins senior portfolio investment manager at Prudential. (Reporting by Danielle Robinson, John Balassi Michael Gambale,and Josie Cox in London,; Editing by Natalie Harrison and AlexChambers)

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