Verizon holds largest bond sale ever

To fund its gigantic $130 billion purchase of Vodafone’s stake, Verizon Communications held the largest bond sale in history, raising $49 billion from the markets.

The Wall Street Journal story called the sale a “frenzy” of demand:

Verizon Communications Inc.’s $49 billion bond offering sparked a frenzy across Wall Street on Wednesday as investors clamored to buy a piece of the largest corporate debt sale in history.

Lured by what many saw as a bargain price, buyers placed orders for about $100 billion of the new bonds, and trading in the market afterward was frenetic. Verizon bonds were the most-traded for the day, with billions of dollars’ worth changing hands, according to MarketAxess.

Verizon executives called prospective investors throughout Tuesday, continuing into the evening even after they knew they had more than enough demand to sell all the debt they wanted, said people familiar with the matter. In the end, more than 1,000 investors submitted orders for the bonds.

Some investors put in orders so large that underwriters called them back to be sure they had the cash to cover the sums they asked for, said people involved in the sale. Some had their orders fully filled and even turned a quick profit selling debt later Wednesday. Other investors who weren’t able to buy bonds directly jumped in to buy the debt in the secondary market.

The Bloomberg story said that Verizon is paying a premium to get investors interested in the deal:

Verizon Communications Inc. (VZ) is poised to pay investors a premium on an unprecedented $49 billion of bonds, a cost Apple Inc. (AAPL) escaped during its then-record $17 billion offering four months ago.

The telephone company may sell $11 billion of 10-year bonds today at a yield that’s 225 basis points more than Treasuries, according to a person with knowledge of the issue. The yield is 47 basis points more than investors demand to own bonds with similar maturities and BBB ratings, according to data compiled by Bloomberg. Apple issued $5.5 billion of 10-year bonds on April 30 at less than the market rate.

While Apple had $145 billion of cash and no debt when it tapped credit markets for the first time in more than a decade, New York-based Verizon will add to its $49 billion of bonds already outstanding to bolster a cash position that accounts for less than 2 percent of the $130 billion it needs to obtain full control of Verizon Wireless from Vodafone Group Plc.

Verizon is marketing eight portions of dollar-denominated bonds, said the person, who asked not to be identified, citing lack of authorization to speak publicly. It’s also postponed investor meetings in Europe linked to the deal that were scheduled to begin tomorrow.

The Associated Press story said Verizon paid up in order to get the deal done quickly:

Verizon probably decided to pay higher interest rates because it needed to wrap up its $130-billion buyout quickly, bond investors said.

The buyout “is a big strategic deal for them, and they needed the money,” said Michael Collins, senior investment officer of Prudential Fixed Income, who bought Verizon bonds during Wednesday’s sale.

Verizon’s massive bond sale comes at a crucial time for bond investors. In June, Federal Reserve Chairman Ben S. Bernanke said the central bank was considering pulling back on its bond-buying program, which has kept interest rates at historical lows in an effort to stimulate the economy.

As a result, the yield on the 10-year Treasury note, the benchmark for all bonds public and private, is at 2.96%, almost double the 1.63% yield from early May.

MarketWatch pointed out that the secondary market has been struggling with liquidity issues, but Verizon demand was strong:

Liquidity in the corporate bond secondary market has been declining in recent years, as highlighted in a Financial Times story Wednesday. Nonetheless, secondary trading on Verizon bonds was strong as investors gobbled up the new debt.

Verizon was by far the most actively traded issuer in the high-grade corporate debt market on bond-trading platform MarketAxess on Wednesday. On the platform, $575.3 billion of Verizon debt had traded as of 11:20 a.m. Eastern, roughly 13% of the $4.38 billion of high-grade corporate debt that had been traded on MarketAxess.

It’s a huge win for Verizon and for the banks that handled the sale. While the fees on bonds are lower, by sheer volume this one should help those banks make their targets for the quarter. Only time will tell if there is real investor demand for paper – especially bonds that pay such a premium – or if this was a one-off deal for a well-known company. I’m sure there are many other corporations considering deals and how to pay for them, and looking to learn a trick or two from Verizon.