By Matt Wirz
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 14, 2018).
AT&T Inc.'s $85 billion purchase of Time Warner Inc. is on track to go down as one of the largest acquisitions in history, but the deal will be dwarfed by an even bigger figure: the combined company's approximately $181 billion debt load.
That would be a 12% jump from AT&T's already hefty $163 billion of bonds and loans outstanding, according to data from research firm CreditSights.
"It's going to be one of the most heavily indebted corporate issuers and that in and of itself makes the company highly dependent on continued access to the capital markets," said Neil Mack, a telecommunications analyst at Moody's. "If the capital markets aren't open and healthy the company could have higher levels of refinancing risk going forward."
Increased revenue from Time Warner's media properties and postdeal cost-cutting is expected to generate cash to pay down the additional debt over time. The company could repay as much as $10 billion a year over the next four years, according to a research report by Oppenheimer & Co. Inc.
Nevertheless, the additional borrowing would elevate one measure of AT&T's leverage -- based on its debt to earnings before interest, taxes, depreciation and amortization -- to a multiple of about three from its stand-alone level of about two times, according to research by Deutsche Bank AG.
That would push AT&T's measure well above that of its largest competitor, Verizon Communications Inc., which is at about 2.6 times, according to CreditSights.
Credit-rating firms have taken notice of the rising risk presented by the Time Warner takeover. Moody's Investors Service has placed its rating of AT&T on review for downgrade pending the deal's completion. A two-notch downgrade would put AT&T at the lowest investment-grade rating Moody's assigns, increasing the likelihood of AT&T falling into the junk-debt category.
A spokeswoman for AT&T said all major ratings firms were only considering single-notch downgrades of the company, which would leave it well above a junk rating.
AT&T's 4.3% bond due in 2030 traded for around 96 cents on the dollar Wednesday, according to data from MarketAxess, relatively unchanged from levels before the court ruling Tuesday approving the purchase of Time Warner.
AT&T's balance-sheet risk could be even greater than its debt load indicates, according to a report by research firm MoffettNathanson. The firm's estimate of the company's leverage includes operating leases and employee postretirement obligations. That raises the combined company's liabilities to about $249 billion, implying a four-times leverage multiple, according to the report.
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