By Rom Badilla
Last week, we covered how fundamentals on investment grade corporate bond issuers are at risk of faltering given the disappointment in second quarter earnings. Given the headwinds of slowing growth, corporate earnings in the coming quarters may be impacted, which could in turn negatively affect performance and corporate bond holders. Not to mention with the weak employment numbers, Federal Reserve policy action via Quantitative Easing or continued rhetoric on low interest rates is now back on the table. Disappointment of the Fed delivering significant and decisive action to fuel a faltering economy may undermine the recent outperformance of risk assets.
While one should never dismiss the big picture macro perspective, an astute investor can still find value out in the marketplace, in particular the corporate bond market, in order to achieve their investment objectives. Here we focus on bonds in the Telecom and Media sector, which benefits from recurring revenue streams and favorable metrics in today’s environment.
Below are details of three investment grade corporate issuers, featuring bonds maturing in the intermediate and long end of the maturity spectrum. The purpose of showing both is to allow investors the opportunity to tailor their bond investments in accordance with their investment objectives.
Information and market quotes on the bond investments are provided by Trade Monster’s Bond Trading Center (unless noted otherwise). Furthermore as a gauge of the overall credit worthiness of the company, we provide some simple credit metrics of each company, two leverage ratios and a ratio that represents a company’s ability to service its debt payments.
Here we will cover two ratios that are used to gauge the amount of debt or leverage that a company has on its balance sheet. The Long Term Debt to Total Assets ratio measures a company’s leverage by determining the percent of assets have been financed by debt. A higher percentage indicates more leverage and more risk.
In addition, the Debt to EBITDA ratio which is represented as a multiple, measures how easily debt can be repaid using a company’s cash flow. EBITDA which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is one measure of profitability. Also, for this particular ratio, we will use the past 12 months of EBITDA. An easy way to interpret this ratio is to say that a company that has a ratio of ‘2x’ would mean that it would take two years’ worth of cash flow to repay its debt. So, a lower multiple is better.
There are two components that make up the next ratio, EBITDA and Interest Expense which is the cost of debt. By dividing EBITDA by the Interest Expense, you have the Interest Coverage ratio which measures a company’s ability to service their debt. In other words, it shows how easily a company can pay interest expense given their profitability. A higher Interest Coverage Ratio implies better credit health since it is making enough money to stay current with their debt interest obligations. Conversely, a red flag is raised when this ratio approaches 1.5 or lower since its ability to pay the interest on their debt is questionable.
AT&T Inc. (T) is the world’s leading communications company which provides voice and data services to people across 22 states. AT&T Mobility has over a million connections in all 50 U.S. states and in more than 225 countries. The company is headquartered out of Dallas, Texas and employs over 256,000 people around the world.
According to Bloomberg data, AT&T has relatively low leverage. The Long Term Debt to Total Assets ratio of 23.0% while the Debt to EBITDA ratio stands at 2.1x as of the end of second quarter.
As for its ability to cover the cost of debt, the company has more than enough in profits. The Interest Coverage ratio stands at 12.0x using last quarter data. Using the data for the past year, the ratio is at 8.6x.
We will look at two bonds with longer dated maturities. The first AT&T bond pays a 3.875% coupon, semi-annually and pays final principal at the maturity date of August 15, 2021 (CUSIP# 00206RAZ5). These senior notes are currently being offered at a dollar price of $113.47 which translates to a yield of 2.20%. In addition, this bond is should be fairly liquid due to its deal size of $1.5 billion. Bonds can be sold with little concession relative to the offered side.
By extending out the maturity, AT&T also issued another senior note back in 2007. This bond which has a deal size of $2.0 billion pays a semi-annual coupon of 6.5% until maturity which is set for September 1, 2037 (CUSIP# 00206RAD4). According to Trade Monster, these bonds are yielding 4.34% to a buyer which equates to a dollar price of $132.79. In addition, these bonds can be sold at a yield of 4.45% given today’s markets.
Both bonds are non-callable and are rated A- by Standard & Poor’s and A2 by Moody’s which falls under the investment grade spectrum.
Time Warner Cable (TWC) owns and manages cable systems passing just over 27 million homes and has approximately 14.5 million customers for its various products which include video, high-speed data, and digital telephone. The company’s vast majority of its customers reside in key regions such as New York, Southern California, and Texas.
Time Warner Cable has a Long Term Debt to Assets ratio of 51.4% and a Debt to EBITDA ratio of 3.6x which are solid given current credit ratings
In addition, the cable company has an Interest Coverage ratio of 5.0x for the most recent quarter. On a trailing 12-months basis, the ratio is at 4.7x.
Time Warner Cable has come to market many times and as a result offers a couple of options across their yield curve. The first one sports a 4.0% fixed coupon that pays semi-annually and matures in September 1, 2021 (CUSIP# 88732JBA5). This bond features a make whole call and is currently being offered at a dollar price of $109.62 which equates to a yield to maturity of 2.78%. For those looking for liquidity, this bond which has a deal size of $1 billion and was issued in September 2011 and can be sold at a yield of 2.91%.
As for a longer maturity bond that offers a little more yield, there is a bond that has a 6.75% fixed coupon that pays semi-annually and matures in June 15, 2039 (CUSIP# 88732JAU2). As with the shorter term option, this bond has a make whole call and has a yield to maturity of 4.81% and is offered at a dollar price of $129.04. The long dated bond was issued in 2009 at a deal size of $1.5 billion and can be currently sold at a yield of 4.99%.
Both bonds are rated investment grade by both rating agencies. Standard & Poor’s rates both bonds BBB while Moody’s has both of these senior notes at Baa2.
News America Incorporated (NWSA) is a diversified media and entertainment company. The company operates primarily in the United States, the United Kingdom, Continental Europe, Australia, Asia and the Latin America. In addition, the company’s media properties include 20th Century Fox, Fox News, Fox Searchlight Pictures, Fox Television, FX and Dow Jones.
The international company has a Long Term Debt to Assets ratio of 26.8% while the Debt to EBITDA ratio stands at 2.3x.
For the most recent quarter, the Interest Coverage ratio is at 5.8x. Over the past year the ratio stands at 6.4x according to Bloomberg.
News America features a bond that pays a fixed semi-annual coupon of 4.5% and matures in February 15, 2021 (CUSIP# 652482CB4). The senior notes have a make whole call and can be bought at a dollar price of $114.24 for a yield of 2.61%. These once 10-Year bonds were issued in August 2011 and have a deal size of $1.0 billion. Because of this, the deal is large enough where liquidity is ample in the market place. These bonds can be sold at a yield of 2.763.
By extending out the maturity, the yield increases for the buyer to 4.96%. This translate to a dollar price of $124.22 for the 6.4% Coupon bond that matures in December 15, 2035 (CUSIP# 652482BL3). The senior notes have a make whole call feature and sports a deal size of $1.15 billion. Given this large deal size and presence, sellers can find liquidity in the market place and execute at a yield of 5.02%.
Both bonds are rated by Standard & Poor’s and Moody’s which have them at BBB+ and Baa1, respectively. In January 2012, S&P has the rating left on review for a possible downgrade. However, several days prior to that announcement, Moody’s affirmed its current rating and provided a ‘Stable’ outlook for the bonds.
All of the aforementioned bonds of the issuer were highlighted by finding the best yield given the dollar price. Some bonds yielded higher but at a cost of a higher dollar premium.
Furthermore, keep in mind that corporate bonds trade over-the-counter. So, prices and yields can vary depending on the broker you use. The best suggestion is to use a broker that offers the most visibility and price transparency for the corporate bond market. This can be achieved by comparing the price to buy and the sale price (aka bid-ask spread). The closer the differential usually means the better the liquidity.
As always, every bond investor should perform their own due diligence when making their investment decisions.
Disclaimer: The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.