Verizon Communications Inc.
is racking up $25 billion in new debt to pay for the spectrum license due this month.
The wireless company won more than half of the proposed wireless airwaves at an auction held by the U.S. government in February, promising $45.5 billion for the airwaves, plus about $8 billion in additional compensation payments to help current users of the licenses move to other bands. The new spectrum rights could help Verizon expand the reach and bandwidth of its fifth-generation wireless service.
Verizon made its first $8.2 billion payment to the Federal Communications Commission (FCC) on Wednesday and will use proceeds from a bond sale that began Thursday to pay off its debt by the 24th payment. March must pay about $36.4 billion to FCC, says financial official
Verizon, the country’s largest provider by subscribers, theoretically has enough money to pay the FCC even without selling bonds. In late February, the company negotiated a $25 billion loan with a consortium of banks that it could draw down if necessary, Ellis said. Verizon also has money left over from a $12 billion bond sale in November and could use that money to make a second payment to the FCC, Ellis said.
Matthew Ellis, CFO of Verizon Communications.
According to Fitch Ratings, the company had $22.2 billion in cash on its balance sheet at the end of December, as well as an undrawn line of credit of $9.4 billion.
In addition to the nearly $54 billion in 5G licenses and related business, Verizon told investors Wednesday that it plans to invest a total of $10 billion over the next three years to expand midband, or C-band, bandwidth previously limited to satellite communications. Much of the $10 billion will be paid in cash through growth in operations, Ellis said. Money creation will provide these investments, he said.
The $10 billion would be in addition to the $17.5 billion to $18.5 billion that Verizon has already budgeted for capital spending in 2021 and plans to maintain that level through 2023, Verizon said.
By taking on new debt for spectrum rights, Verizon will be slower to retire its debt, Ellis said. The company’s net debt at the end of 2020 was $129.06 billion, down from $131.32 billion a year earlier but higher than in previous years, the rating agency said.
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American companies have taken on record amounts of debt since the Federal Reserve acted aggressively to stabilize financial markets during the coronavirus pandemic last spring. According to data provider Dealogic, U.S. corporate bond sales reached $1.48 trillion in 2020, up more than 63% from 2019. According to Dealogic, U.S. companies have raised $265.65 billion in bonds this year through Thursday, up about 36% from last year.
Verizon’s ratio of unsecured net debt to earnings before interest, taxes, depreciation and amortization is expected to be 2.8 times by year-end, the company said Wednesday in a presentation to investors. Verizon says it will drop by about half over the next four to five years.
Verizon’s business is very stable and cash-rich, so the company could easily handle that debt, said Peter Supino, a senior analyst at brokerage Sanford C. Bernstein & Co. It has promised its rating agencies that it will reduce its debt over the next few years to return to a more flexible position, he added.
Still, Verizon’s debt could limit the company’s strategic options, said Michael Hodel, an analyst at research provider Morningstar Research Services LLC.
Verizon expects to pay about $4 billion more in interest to bondholders over the next three years after selling the debt, Ellis said. He said the company expects to offset higher interest costs with lower cash payments for income taxes, which are expected to be about $5 billion lower than previously forecast, partly due to depreciation charges under the Tax Cuts and Jobs Act of 2017.
-Drew Fitzgerald contributed to this article.
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