Wall Street banks are writing some of their biggest checks ever to fund AT&T's takeover of Time Warner as they seek a bonanza of fees. But there's a dose of concern that the $40 billion loan pledge may get caught up in a regulatory impasse.
JPMorgan Chase has pledged $25 billion of the financing, with Bank of America providing the rest, according to a person with knowledge of the matter who asked not to be identified without authorization to speak publicly. The lending commitment gives the banks an advantage on bond offerings that would find willing buyers among yield-starved investors, analysts say. At the same time the banks face the risk that the deal, along with a chunk of their balance sheets, would be tied up if regulators delay approving the deal.
"This could be an especially lucrative deal for the banking industry; they're going to make a lot of money if the deal gets done" said Bert Ely, a banking consultant at Ely & Co. "The numbers on the credit piece look big, but I'm sure the credit risk will be spread widely. The big uncertainty hanging over this will be the battle for regulatory approval and what lender protections are included if the deal fails."
A failed megadeal wouldn't be the first for AT&T. In 2011, the company abandoned its takeover of T-Mobile because of regulatory hurdles. JPMorgan had lined up $20 billion to finance that deal.
The $25 billion JPMorgan has promised to lend AT&T for the Time Warner takeover is its biggest commitment for a deal, according to a person with knowledge of the matter. JPMorgan brought in Bank of America as its partner on Thursday and plans to syndicate the loan to other banks within weeks.
The loan is structured as an 18-month bridge loan, a type of financing that a borrower repays by selling bonds.
AT&T said that it's seeking to hang onto its investment-grade credit rating after the deal is completed. But the lenders themselves are taking on other risks by using their balance sheet resources, according to Charles Peabody, a bank analyst at Compass Point Research & Trading.
"That is dangerous because this deal could be hung up in antitrust wranglings for a long time," he said. JPMorgan and Bank of America won't be protected if credit markets swing and they can't sell the debt for what they had anticipated, he said.
Jessica Francisco, a JPMorgan spokeswoman, and Thomas Rottcher, a Bank of America spokesman, declined to comment. AT&T, based in Dallas, didn't immediately reply to an email and calls on Sunday.
The deal caps AT&T Chief Executive Officer Randall Stephenson's vision to expand the company into media and entertainment as its wireless business matures. Gaining premium cable channels HBO, CNN and the Warner Bros. studio means AT&T becomes a content owner rather than just a distributor of video.
For debt investors, any financing backing the takeover would offer a juicy alternative to the more than $10 trillion of debt globally that's yielding less than zero, driven down by easy-money policies from Europe to Japan.
"The investor base is starved for yield," said David Hendler, founder of Viola Risk Advisors and a veteran bank analyst. "This would be a good earning asset in a low yield world _ which is very much in demand at the moment in the syndicate market. Banks are deposit-rich and looking to invest in loans."
The prospective deal has raised regulatory questions ahead of the U.S. election, as both the Democratic and Republican presidential nominees expressed suspicion of blockbuster deals. Hillary Clinton has been critical of big mergers and has called for "reinvigorating" antitrust enforcement while her opponent Donald Trump broke with Republican orthodoxy on Saturday by saying he would block the Time Warner acquisition, arguing that such deals leave too much power concentrated among too few companies.
Beyond collecting the fees that come from underwriting large takeovers, banks also benefit from trading that debt in the secondary market. CEO Brian Moynihan pointed to Bank of America's debt underwriting business as a reason for his beat last week in estimates for third-quarter fixed-income trading revenue.
"These guys are fairly anxious to generate fee income. This is an area where you can make money very quickly. And very big money," said Compass Point's Peabody.
