(Bloomberg) — AT&T Inc. and Discovery Inc. secured $106 billion in orders for what could be one of the largest corporate offerings ever as the companies seek to fund their media business combination. The strong demand is a sign investor appetite is returning to a market that’s been rattled by inflation and Russia’s invasion of Ukraine.
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The two companies are selling bonds via a unit, Magallanes Inc., in as many as 11 parts, according to a person with knowledge of the matter. The longest portion of the offering, a 40-year security, may yield 3.05 percentage points above Treasuries after earlier discussions around 3.25 percentage points, said the person, who asked not to be identified as the details are private.
The offering could be around $25 billion to $30 billion, according to a person familiar with the matter, making it potentially the largest issuance since AbbVie Inc.’s bond sale to help finance its acquisition of Allergan Plc in 2019 and possibly the fifth-biggest U.S. high-grade bond issue on record, according to data compiled by Bloomberg.
There continues to be a gross imbalance with too many dollars chasing too few investment opportunities, according to David Knutson, head of U.S. fixed income product management at Schroders Plc.
“Investors were ready for the deal and feel like it is an opportunity to capture the backup in spreads,” said Knutson in an emailed response to questions. “It is very difficult to do this in the secondary market.”
Read more: GUIDANCE: Magallanes $Benchmark Debt Offering in 11 Parts
Order books for the sale peaked at $106 billion after soaring quickly through the day, people familiar with the offering said. That’s the strongest demand for a corporate debt offering since CVS Health Corp. sold bonds in 2018, and shows that investors are willing to take risk in a market that has been shaken by Russia’s war combined with a global inflationary backdrop.
AT&T and Discovery’s offering is rated BBB- by S&P Global Ratings and Baa3 by Moody’s Investors Service, both at one step above junk.
In May, AT&T said it would spin off its media assets, which include HBO, CNN and the Warner Bros. studio, and merge them with Discovery in a $43 billion deal. The transaction, which is expected to close in April, will unite the broadcaster of 90 Day Fiancé and Property Brothers with the company behind Succession and the Batman movies, creating a media giant with cable channels, a movie studio, and at least two streaming services (Discovery+, HBO Max). The combined company, to be called Warner Bros. Discovery, will have about $55 billion in debt.
If Wednesday’s bond sale is well received by investors it may give other companies the confidence to issue debt in a credit market that has been spooked by geopolitics and monetary policy changes. Goldman Sachs Group Inc, JPMorgan Chase & Co. and Barclays Plc are managing the offering, the person said.
Impacting Treasuries
The large high-grade bond offering may also be impacting the Treasury market. The long-end of the U.S. government bond curve dropped to session lows Wednesday morning in New York and remains under pressure after the deal announcement. And long-end swap spreads have continued to widen, indicative of how money flows linked to corporate issuance may be weighing on the long-end of the curve.
U.S. investment-grade bond sales have roared back to life in recent weeks even as the cost to borrow is increasing, a sign that companies want to lock in funding now amid expectations that the volatility will persist. About $80 billion of bonds have been sold already in March as syndicate desks have been waiting to pounce on an opportunity to sell debt.
Even so, investors have been pulling money from corporate debt this year amid the global volatility. Funds that invest in U.S. high-grade bonds posted last week the biggest withdrawal in almost three months, with outflows totaling about $3.3 billion, according to Refinitiv Lipper. And the benchmark high-grade index has tumbled more than 7% so far this year after its the steepest January-February decline since 1980.
(Updates order book details throughout, price talk in second paragraph, adds investor comment from fourth paragraph)
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