As the clock phase of the C-band auction spectrum winds down with proceeds that have crushed initial expectations, AT&T is looking to borrow $14 billion to help acquire spectrum and is in early talks with banks, Bloomberg reported Tuesday.
Bank of America is leading the transaction for what Bloomberg, citing sources with knowledge of the matter, says is a 364-day delayed-draw term loan, with commitments due on January 2. The report noted that the structure would allow for AT&T to wait until the cash is needed and likely refinance in the bond market within a year.
Focus on carriers’ spectrum investments and related debt have gained increasing attention as bids for 5G licenses in the 3.7 GHz band climbed higher and higher since starting on December 8.
As of round 83 on Wednesday gross proceeds stood at $80.86 billion. That doesn’t include accelerated clearing payments and relocation costs, estimated at $9.7 billion and $3.3 billion, respectively, to be paid by winners.
Activity started to slow at the end of last week and Wednesday the auction format shifted to seven rounds per day with shortened times starting Monday.
The Bloomberg report echoes what New Street Research said earlier in the week that if T-Mobile is spending less than expected, AT&T and Verizon are likely making up the difference and would need to borrow more money to do so.
“If T-Mobile spends less than we expect, Verizon or AT&T will likely account for the shortfall,” wrote New Street analyst Jonathan Chaplin in a note to investors Monday. “Neither company has the cash on hand to cover what we expect them to spend in the auction at present; we would expect more debt issuance for the group in coming weeks.”
AT&T, Bloomberg pointed out, is the world’s largest nonfinancial corporate borrower, with around $159 billion in debt at the end of the third quarter.
Wells Fargo analysts on Sunday indicated that AT&T's post-auction balance sheet wouldn't necessarily cause a rating downgrade.
"Even if AT&T’s balance sheet doesn’t look investment-grade following the auction, would the rating agencies actually act? In many ways, they may be loath to cut the rating of such a large and strategically important American corporation," wrote analysts led by Eric Luebchow.
T-Mobile on Monday announced it was raising $2 billion from the bond market to acquire additional spectrum. New Street said the move brought T-Mobile’s auction spend to $11 billion, below the firm’s estimate of $18 billion.
While auction winners won't be known until later, equity research firm Cowen last week estimated Verizon’s auction spend at $35 billion, AT&T at $20 billion and T-Mobile between $10-$15 billion.
AT&T and Verizon are often viewed as needing C-band spectrum more desperately, both for their own 5G ambitions and to in order to compete with T-Mobile who has an arsenal of 2.5 GHz it’s already deploying. Cable operators and Dish are in the mix as well.
As of Monday, Raymond James analysts maintained their view that the clock phase will land at $82 billion in final gross proceeds.
There’s still an assignment phase to go, meaning weeks “before the FCC releases the details to what are the ~$100B questions: who bought how much C-Band spectrum and where,” wrote Raymond James’ Ric Prentiss.
The C-band auction is the only near-term opportunity for carriers to acquire mid-band frequencies that are in the sweet spot for both coverage and capacity. Right before the auction kicked off MoffettNathanson analysts pointed to the importance saying “Who ‘wins’ the C-Band auction will shape the competitive dynamics of 5G for a decade.”
But as prices have climbed, that definition of “winning” has shifted for some, and Moffett in recent weeks pointed out that higher spectrum prices don’t translate to greater-than expected revenues. As a follow-up the firm put out a separate note Monday that drew parallels between the C-band auction and 3G auctions in Europe in 2000 where operators overpaid for spectrum and were left with huge debt burdens that had long-term impacts.
“To be fair, the valuation backdrop is very different today. Verizon and AT&T are trading at just half the market multiple; no one can argue that they are subject to the extravagant expectations that burdened the European industry twenty years ago. Moreover, the magnitude of the current C-Band auction relative to industry cash flow pales in comparison,” wrote analyst Craig Moffett.
Today’s interest rate environment also alters the comparison, he added.
“Given that spectrum is tax deductible for cash tax purposes (straight line over fifteen years), it is not inconceivable that the tax shields from spectrum purchases will exceed the ultra-low debt carrying costs, making the purchases (bizarrely) free cash flow accretive,” wrote Moffett.
New Street, meanwhile, maintained its position that “carriers can’t overspend on this spectrum; the more a carrier wins, the better off they are.”