(Bloomberg) -- Verizon Communications Inc.’s bonds got a boost Tuesday after the phone company said it will see an increase in cash flow of as much as $4 billion stemming from the U.S. tax reform.
The largest American wireless carrier said it would use the savings to strengthen its balance sheet, which according to Lindsay Gibbons, an analyst at CreditSights, could mean the company will pay down some of its debt. The yield premium, or spread, over Treasuries investors demand to hold Verizon’s 5 percent notes due in 2049 narrowed four basis points to 189 basis points, according to Trace bond-price reporting data. The bond traded at 103.504 cents on the dollar, up from 102.685.
“Certainly it gives us the ability to bring the leverage down at a little faster rate,” Chief Financial Officer Matt Ellis said in a Tuesday conference call. Verizon spokesman Bob Varettoni said that the company, which is currently graded three notches above junk at BBB+ by S&P Global Ratings, is on a “good trajectory" to reach its goal of A level credit metrics.
The announcement comes during the nascent stages of a long-predicted reduction in the size of the U.S. corporate-bond market as a result of the tax cuts, as lower tax rates make interest deductions less valuable and companies repatriate earnings held abroad. Verizon’s debt had ballooned to $117 billion at the end of 2017, up from about $52 billion five years earlier.
Verizon isn’t using the tax windfall to boost network spending, even as it expands into 5G wireless technology. The company said Tuesday it expects that 2018 capital expenditures to be between $17 billion to $17.8 billion compared with $17.2 billion last year even as it faces competition from T-Mobile US Inc. and AT&T Inc.
“Verizon remains challenged by competitors in the wireless sector,” said CreditSights’s Gibbons. “The company’s wireline business is also contracting. Verizon is getting hit from all angles, and that’s why we have seen leverage rise."
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