A group of AT&T bondholders is up in arms over the terms of an $11.76 billion debt exchange set to close this Friday. Some investors are complaining that they're being short-changed, but most investors are resigned to go along with the deal anyway, say buy- and sell-side officials. A banker close to AT&T says the company will not negotiate the terms of the deal. He advises bondholders to accept the offer on the table, arguing that the bonds currently trade at a higher price than if there was no exchange.
The complex debt exchange was put together to facilitate Comcast Corp.'s purchase of AT&T's broadband assets. It involves approximately 13 issues, but the controversy surrounds the $3 billion 6.5% notes of '29. While holders of the other issues receive various incentives such as step-up coupons, higher coupons or Comcast bonds, holders of the '29s receive only a soon-to-be issued shorter duration AT&T issue with the same 6.5% coupon, maturing in 2013. The bonds will be exchanged one-for-one at the market price on the date of the settlement November 6.
One East Coast-based holder of the bonds believes the exchange will go ahead as planned, but he worries that AT&T may have temporarily damaged its relationship with bondholders. "AT&T has a reputation as a tough negotiator, and they're shining through on this one as well," he says.
The banker says the company offered less favorable terms on the '29s because investors drove up the price of the bonds after the company announced that it would shorten the maturity of a longer-dated issue. At the time investors did not know it would be the '29s. As a result, AT&T believes the investors have already been compensated, according to the banker. Most investors have come to accept that they made a nice profit on the bonds, and are prepared to accept the terms of the deal, the banker says. "If they don't participate, they could lose 5-8 points," he says, predicting that following the exchange the bonds will trade down. "They shoot themselves in the foot. It's financial suicide," he says.
The 6.5% notes of '29 were trading at a dollar price of 80 last Friday morning. The bonds had been as low as 70 on Aug. 12 when it was announced that there would be an exchange. They then hit 85 on Oct. 4, when the terms were disclosed. The East Coast money manager says the bonds have traded off since holders of the '29s have seen that the terms are likely less favorable than what they had sought.
Calls to Thomas Horton, senior executive v.p. and cfo at AT&T, were referred to Eileen Connolly, a firm spokeswoman, who declined comment. --Dan Freed