In the last big hurrah of the corporate bond market for this year, British Telecommunications (BT) sold $10 billion of global bonds in four parts this morning.
The deal is one of the largest ever to hit the corporate bond market, and is the largest dollar offering ever in that market.
In June, Deutsche Telekom sold $14.6 billion of bonds, $9.5 billion in dollars and the remainder in other currencies.
At 10 AM, shortly before BT priced its bonds, a source close to the deal said, somewhat breathlessly: “We’re in the midst of the biggest deal ever.”
Interest in the BT bonds was tilted toward the shorter maturities. The offering includes:
“The tranche sizes reflect the extent of the interest” buyers have in the offering, a source close to the deal said this morning.
Market observers say that BT has been forced to pay as much as 50 basis points more in yield than current levels for similar issues such as Deutsche Telekom.
In addition, uncertainty in the bond market in general and in the telecom sector in particular have forced the firm to widen spreads on the five-, 10- and 30-year tranches in comparison to levels forecast as of the start of the deal’s European roadshow in November.
At that time, sources away from the deal were predicting a five-year at 210 over Treasuries, a 10-year at 250 over and a 30-year at 280 basis points over Treasuries.
News of the three-year floating-rate tranche had not surfaced until this week.
The deal, which is being lead managed by Merrill Lynch, Schroeder Salomon Smith Barney and Morgan Stanley Dean Witter, represents the end of a saga which began during the summer, when BT announced its intention to borrow up to $10 billion to pay for “new generation” mobile phone licenses.
The borrowing effort was derailed in August, when Standard & Poor’s warned of possible downgrades in the telecommunications sector, reserving some of its harshest language for BT.
This was followed in rapid succession by similar warnings by Moody’s Investors Service. When the dust settled before Labor Day, both ratings agencies had downgraded BT debt four notches to “A” (S&P) and “A2” (Moody’s).
But BT’s borrowing needs apparently did not evaporate along with its credit rating. Planned assets sales notwithstanding, the firm was forced to ressurect the bond sale.
The firm employed several strategies to shore up the deal by the time it was again unveiled to the public on Nov. 17.
In addition to adding another lead (Morgan Stanley Dean Witter) and offering more yield than comparable issues, BT was compelled to offer a “step-up coupon” provision to reassure investors worried about possible downgrades.
Under this provision, BT is required to increase the interest rate on the bonds by 25 basis points for each ratings downgrade below A3/A-, which is the lowest level S&P and Moody’s Investors Service give in the “A” area.
So, for example, if both S&P and Moody’s each downgrade the bonds one notch, BT must increase the interest rate by 50 basis points.