Verizon Communications Inc. Bonds: The Second Time Is Not The Charm

We first looked at the bond market perspective on Verizon Communications Inc. (NYSE:VZ) on September 10, 2013. Just today, T-Mobile US, Inc. (TMUS) agreed to pay Verizon Communications Inc. $2.365 billion in a "spectrum swap" as the major service providers battle for market share in the United States. Verizon Communications Inc. agreed on September 2, 2013 to buy out the Vodafone Group PLC (VOD) interest in the company's U.S. wireless business. At that time, the marketing process for a Verizon Communications Inc. bond issue estimated at $25 billion was underway. In this note we re-examine the risk and return trade-off for the bonds of Verizon Communications Inc. Today's study incorporates Verizon Communications Inc. bond price data as of January 3, 2014. A total of 255 trades were analyzed on 22 fixed-rate non-call bond issues of Verizon Communications Inc. with trading volume of $96.3 million. We omitted data on one bond issue for which reported trade information was obviously in error. We leave for another day an analysis of spread on the bonds of various regional subsidiaries of Verizon Communications Inc.

We reach two important conclusions. First, we again believe that Verizon Communications Inc. would be judged "investment grade" by a majority of analysts. Our second conclusion is the opposite of our judgment in September. From an investor value perspective, we look at the ratio of credit spread to default probability. By this measure, Verizon Communications Inc. bonds now offer below average value, compared to the above-average value indicated by market prices in September. We explain our conclusions in what follows.

Verizon Communications Inc. Analysis

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

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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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