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Debt reduction at AT&T could drive out-performance
admin | February 1, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
AT&T management continues to focus on debt reduction, with a plan to utilize a combination of free cash flow and asset sales to reduce debt by $20 billion in 2019. Successful execution of asset sales in particular could be the catalyst for AT&T debt outperforming peers, including Verizon. AT&T may forgo a tender offer, but could execute an exchange for existing TWX bonds to reduce any structural subordination.
AT&T reiterates focus on debt reduction
AT&T’s (T) quarterly results were shrugged off by the bond market as the focus was on management’s progress so far on debt reduction since the close or the Time Warner Entertainment (TWX) acquisition. Management reiterated their top priority for 2018 and 2019 is debt reduction and reported that net debt has been reduced by $9 billion since the close of TWX. Record free cash flow of $22.4 billion for the year and $7.9 billion in the quarter is fueling T’s debt reduction efforts.
As management looks to 2019, they are forecasting $12 billion of free cash flow after dividends will be used to repay debt. Based on estimates of $60 billion of adjusted EBITDA, management believes it can reduce net debt to the $158 billion area, bringing leverage down to roughly 2.6x. Additionally, company management is looking at ways to monetize some real estate asset as well as non-core assets to bring in more proceeds for debt reduction. T believes it can generate $6 to $8 billion of proceeds from asset sales and working capital initiatives to be used for debt reduction. The additional proceeds would bring net leverage to management’s 2.5x target by year-end 2019.
Exhibit 1: AT&T’s debt reduction plan
Source: AT&T company reports
Relative Value
As AT&T looks to reduce debt in a meaningful way, the bonds could outperform peers, particularly Verizon, in 2019. The largest catalyst for the out-performance will be management’s ability to execute asset sales. These asset sales are imperative in getting management to that approximate $20 billion of debt reduction in 2019, while demonstrating management’s commitment to the leverage target.
The company has roughly $6.8 billion of debt maturing this year, including TWX’s $650 million maturity in June, and nearly $13.2 billion of term loans outstanding. That said, a tender offer may not even be necessary in hitting its debt reduction target for the year. Furthermore, there is still a strong likelihood that T will execute an exchange offer for existing TWX bonds in an effort to reduce any structural subordination.
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