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Sunday, February 21, 2016

AT&T And The Mountain Debt



As many of my followers know I have been covering AT&T (NYSE:T) heavily of late because I continue to establish the thesis that the company is changing. How? Well, one word - innovation. I argue that this is no longer the second-rate phone company it was once known as. I contend that moving forward that the stock will cease to trade sideways while paying its nice dividend, because the company is changing its approach. Look I love the dividend. I love the stability of the stock. But what I love even more is a company that is able to increase its payout to shareholders and provide growth as well. This path to innovation and the crux of my thesis centers on the unprecedented push to integrate its DirecTV content with mobile. If you have not looked into the service in a while, it is offering the best new customer deals I have seen in years. The company is also looking to take the lead in the sector and be first on 5g technology. I invite you to review these pieces and to read more on the story of innovation that I am telling. The bottom line is that AT&T is serious about being a leader as the 21st century progresses. However, there remains one key bottleneck to the company andthe stock's success. I am talking about the debt. Strike that. I am talking about the mountain of debt.

I have cited many times previously in prior articles that the large amount of debt is a risk for AT&T. The debt is keeping management from raising its dividend by more than a penny each year. The debt keeps a lid on research and development expenses. The debt also keeps many would be investors out of the name. I am on record as saying that the company must prioritize reducing its debt and protecting its ratings. That said, the company has taken yet another step in the right direction.


In a somewhat quiet and under-covered story in my opinion, the company today began exchange offers of 16 series of its DirecTV notes for AT&T notes. We are talking about a credit positive move on the order of $17 billion. Now I will admit, I am certainly not an expert in debt restructuring, but the news sounded very positive. You can read specifically about the notes being exchanged here. The details of the exchanges, while important, are beyond the scope of this article and would really be a regurgitation of the facts. But I will say that each AT&T note issued in exchange for a DirecTV note will have an interest rate and maturity that is identical to the interest rate and maturity of the tendered DirecTV note, as well as identical interest payment dates and optional redemption prices. No accrued but unpaid interest will be paid on the DirecTV notes in connection with the exchange offers. However, interest on the applicable AT&T Note will accrue from and including the most recent interest payment date of the tendered DirecTV note. In other words, the move isn't really costing the company, other than interest on the AT&T note. So why is this move a positive?

To answer this question I turn to expert commentary from Moody's, who specializes in debt and debt ratings. They discussed the move. There is one key point in Moody's note that I want to focus in on. They stated:

"The exchange offer has the potential to greatly reduce in the degree of structural subordination of debt at AT&T Inc. If a large majority of debt is tendered, the exchange will reduce the amount of debt structurally senior to unsecured creditors of AT&T Inc. from $37billion (26% of total, including device securitization and Mobility II preferred equity) to around $20 billion (15% of total)."

What this means for shareholders is that without such a move, the amount of debt as stands today in its current format would pressure AT&T's unsecured ratings. This means, that the move is helping stave off a potential credit downgrade. That is a key piece of positive news. A downgrade means increased costs of borrowing and of course unsettles investors. Any DirecTV debt that is exchanged for AT&T notes will be rated at Baa1, which is in line with current ratings. All in all, if a large degree of debt is moved in this manner, it will reduce the amount of debt structurally senior to unsecured AT&T creditors from $37 billion to around $20 billion, yielding the $17 billion figure I mentioned above.

Bottom line here? The move saves money. It makes the debt "cheaper" for lack of a better term and protects the rating of the debt. Since the debt is among the largest concerns of shareholders, I felt it prudent to cover this piece. Now I want to turn it over to you? What do you think about the move? Will DirecTV debt holders bite? Do you agree lowering costs long-term makes the debt more manageable? Let the community know below.

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