September 6, 2013 / 2:44 PM / 4 years ago

Sprint puts jumbo deals back on high yield map

5 Min Read

* Sprint's USD6.5bn high yield bond second largest on record

* More issuers expected to burst onto scene next week

* Concessions could rise if Verizon reprices market

By Joy Ferguson

NEW YORK, Sept 6 (IFR) - US wireless giant Sprint eradicated any fears of lackluster demand for high yield debt this week with a USD6.5bn deal that was more than triple the size the issuer had hoped to raise and reminiscent of jumbo deals seen in pre-crisis days back in 2007.

The bond, heard to be coming since July, was well-timed, hitting the market quickly after the August slowdown and before an expected mammoth transaction from higher-rated Verizon which has the potential to reprice the entire telecom sector.

According to Thomson Reuters SDC/IFR data, Energy Future Holdings' USD7.445bn offering, priced and distributed in late 2007, was the largest deal on record, which puts Sprint's transaction in second place.

It is also easily the largest high-yield transaction year-to-date, beating both MetroPCS Wireless' and Intelsat's USD3.5bn bonds which priced in March.

Sprint's deal, which will fund its capital expenditure plans and refinance debt, has boosted confidence that other issuers in a busy pipeline for September, heard to be as high as USD35bn, will be equally well received.

"The fact that Sprint was able to do a USD6.5bn deal within the context of the initial price talk is a good indication of the strength of demand in the high-yield market right now and it bodes well for other large deals coming in September," said one high yield banker not directly involved in the deal.

The upcoming flow could include a number of leveraged buyout financings for names such as Dell, Activision Blizzard, Apollo Tyres, Community Health, Hub International, Hilton and Hudson Bay that are all gearing up with high-yield bond offerings.

The most high profile of those is Dell. Backed by some USD13.75bn of debt, of which USD3.25bn will consist of bonds, the financing is the biggest of them all.

A bank meeting is scheduled for September 11, and the Dell bonds are expected to launch soon after a shareholder meeting the following day to approve the acquisition.

Close Eye on Flows

Some observers questioned whether the Sprint deal was a step too far the market that is still suffering from outflows, but the more general view was that it was a landmark transaction and that investors still have plenty of cash.

"The color we are getting is that investors had elevated cash balances going into this deal, so things feel positive," said the banker.

"But we are still facing concerns with Syria and what the Fed is going to do with tapering, so we will keep a close eye on fund flows. The Sprint deal and the large calendar have the potential to impact how the market trades if a lot of cash leaves the system."

Sprint's deal, split between two tranches, was well oversubscribed with around USD11bn worth of orders from a wide range of investors including money managers, hedge funds, insurance companies and mutual funds.

JP Morgan was left lead, along with Deutsche Bank, BofA Merrill, Citi, Credit Agricole, Credit Suisse, Goldman Sachs, RBC, Scotia, Wells Fargo and Williams.

Both tranches priced at par with coupons of 7.25% and 7.875% on the eight-year and ten-year respectively for USD2.25bn and USD4.25bn sized deals.

The main selling point was Softbank's new ownership.

Softbank bought about 78% of the No.3 US mobile network operator in July after a bitter takeover battle with Dish, which eventually bowed out of the race. Softbank raised its stake further last month after buying more common stock.

From an investor viewpoint, Softbank is a very well regarded company, and has infused the company with capital and backed it up with resources as Sprint spends heavy amounts of money on its capex plans.

The fact that the bonds eventually held in above par in secondary, even as 10-year Treasury yields breached 3% on Thursday for the first time since July 2011, was also a positive.

"Right now there is enough cash for these other deals," said one high yield investor.

"But if we were to see a pop in the 10-year Treasury north of 3.10%, you might see retail investors panic and withdraw from HY funds."

For the week ending Wednesday, Lipper reported a USD415.98m outflow from high-yield mutual funds and ETFs, following a negligible USD54.7m inflow the previous week.

Verizon Repricing Worry

What does appears a certainty, however, is that investors are going to demand attractive concessions to compensate them for future volatility down the line.

Sprint's deal, rated B1/BB-, came with about a 50bp concession on the longer tranche. There was also a relatively wide spread, at 62.5bp, between the eight-year and 10-year tranches, which six months ago would have been more in the 25bp range, the banker said.

Upcoming deals, that are likely to coincide with Verizon, may have to pay even more.

"Verizon's deal, because of its size, is going to need a big new issue concession, so that could put some pressure on high-quality BB telecom paper," one observer said.

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