A pair of telecom analysts says that of the three high-grade regional bell operating companies (RBOCs), only Verizon Communications offers slight upside for fixed-income investors. Spreads tightened on 10-year bonds of Verizon, SBC Communications and BellSouth after a Wall Street Journal report indicated that a proposal by the Federal Communications Commission would ease restrictions on the baby bells that require them to share their networks with competitors. However, Matt Bartlett, analyst at Banc of America Securities, expects vigorous litigation from the long distance carriers that will try to block or alter the proposal. He also expresses concerns about the apparent two-year timetable for implementation of the changes.
BellSouth's 6% notes of '11 (Aa3/A+) tightened 13 basis points to 70 over Treasuries last Tuesday. SBC's 5.875% (Aa3/AA-) notes of '12 narrowed five basis points to a spread of 90. The Verizon 6.875% notes of '12 (A2/A+) were 15 basis points tighter at 135 over the curve. Bartlett still sees room for 20 basis points of additional spread tightening for Verizon versus SBC and BellSouth. He says that the latter two credits will underperform because they are more likely to make acquisitions that could force them to increase debt levels.
Given the recent spread tightening, Tim Caffrey, analyst at Barclays Capital, urges investors to look at operating company debt for the RBOCs. Because it is structurally senior to the holding company bonds, operating company paper offers more protection against downside risks such as acquisitions and the still uncertain economy. Recent spread tightening throughout the capital structures of the RBOCs has reduced the premium investors need to pay for such protection, Caffrey says. He points to the Verizon Florida 6.125% notes of '13 (A1/A+), which were bid at 126 basis points over Treasuries last Tuesday. "The problems of last year probably don't come back with the same magnitude, but who's to say they don't come back? For nine basis points, it's not bad insurance," he says.