AT&T Inc. Bonds: For Whom Does The Bell Toll?

Dec. 17, 2013 2:49 AM ETAT&T Inc. (T)5 Comments

We last analyzed AT&T Inc. (NYSE:T) on August 27, 2013 and the headline read "not a ringing endorsement." Then and now, the telecommunications sector around the world is experiencing enormous disruption. Monday, AT&T Inc. announced a nearly $5 billion deal by which Crown Castle International Corp. (CCI) would have exclusive leasing rights on 9,000 AT&T Inc. wireless towers. In August, we noted that bond holders of AT&T Inc. were receiving a lower than average reward-to-risk ratio compared to investment grade bonds widely available in the marketplace. In this note, we confirm that the AT&T Inc. bond reward-to-risk ratio has narrowed further, a surprising conclusion as the upheaval in telecommunications continues.

Today's study incorporates AT&T bond price data as of December 13, 2013. A total of 426 trades were reported on 26 fixed-rate non-call bond issues of AT&T with trade volume of $133.5 million.

The purpose of this note is to answer two simple questions:

  1. Are the bonds of AT&T Inc. "good value" relative to other bonds available in the market place?
  2. In light of the new definition of investment grade outlined at the end of this note, how would most analysts classify AT&T Inc., as investment grade or not?

Assuming the recovery rate in the event of default would be the same on all bond issues, a sophisticated investor who has moved beyond legacy ratings seeks to maximize revenue per basis point of default risk from each incremental investment, subject to risk limits on macro-factor exposure on a fully default-adjusted basis. In this note, we also analyze the maturities where the credit spread/default probability ratio is highest for AT&T Inc.

Term Structure of Default Probabilities

Maximizing the ratio of credit spread to matched maturity default probabilities requires that default probabilities be available at a wide range of maturities. The graph

This article was written by

Donald van Deventer profile picture
A daily ranking of corporate bonds by best risk-adjusted return

Donald R. van Deventer is a Managing Director in the Center for Applied Quantitative Finance at SAS Institute, Inc. Prior to the acquisition of Kamakura Corporation by SAS on June 24, 2022, Dr. van Deventer was the Chairman and Chief Executive Officer of Kamakura Corporation. He founded the Kamakura Corporation in April, 1990. The second edition of his book, Advanced Financial Risk Management (with Kenji Imai and Mark Mesler) was published in 2013.  Dr. van Deventer was senior vice president in the investment banking department of Lehman Brothers (then Shearson Lehman Hutton) from 1987 to 1990. During that time, he was responsible for 27 major client relationships including Sony, Canon, Fujitsu, NTT, Tokyo Electric Power Co., and most of Japan's leading banks. From 1982 to 1987, Dr. van Deventer was the treasurer for First Interstate Bancorp in Los Angeles. In this capacity he was responsible for all bond financing requirements, the company’s commercial paper program, and a multi-billion dollar derivatives hedging program for the company. Dr. van Deventer was a Vice President in the risk management department of Security Pacific National Bank from 1977 to 1982. Dr. van Deventer holds a Ph.D. in Business Economics, a joint degree of the Harvard University Department of Economics and the Harvard Graduate School of Business Administration. He was appointed to the Harvard University Graduate School Alumni Association Council in 1999 and served through 2021. Dr. van Deventer was Chairman of the Council for four years from 2012 to 2016. From 2005 through 2009, he served as one of two appointed directors of the Harvard Alumni Association representing the Graduate School of Arts and Sciences. Dr. van Deventer also holds a degree in mathematics and economics from Occidental College, where he graduated second in his class, summa cum laude, and Phi Beta Kappa. Dr. van Deventer speaks Japanese and English.

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