Ignis' Citywire A-rated Chris Bowie has warned investors to be wary over Verizon Communications' massive bond issue.
Verizon is set to embark on a roadshow, which could see it offer a record $20 billion in corporate bonds to help fund its $130 billion buyout of Verizon Wireless, its joint venture with Vodafone.
According to reports, the deal is likely to be structured in an eight tranche deal with maturities ranging from three to 30 years.
It is rumoured that Verizon's 10-year bond could yield around 225 basis points above its US Treasury equivalent, which would be 75 basis points more than existing 10-year Verizon bonds.
While some may be excited by the prospect of such juicy returns, Bowie, who is head of credit at Ignis, is adopting a more guarded wait and see approach.
'It is such a big deal and we will be looking closely at it, but it has to come cheap. While the telco sector has been the primary source of activity in credit recently, many investors have been burnt,' Bowie said.
He is also concerned that the Verizon bonds may follow the same pattern as Virgin Media after its acquisition by Liberty Global in a $23.3 billion deal earlier this year.
'After years of trading as a high yield credit due to its high debt profile, it [Virgin Media] was able to push into investment grade. However, the Liberty deal bounced it right back to high yield, resulting in sharp losses,' Bowie said.
But with the corporate bond market starting to look attractive again, Bowie is giving careful consideration to the Verizon 10-year bond.
He said: 'The mooted level for the 10-year would be quite appealing, but we will have to see how it eventuates. Overall, with gilt yields pretty much doubling over the past year, we are beginning to see signs of value returning to the market.
'However, spreads are still tight and there is a bit of a way to go.'
Bowie manages the Ignis Corporate Bond fund which, according to Lipper, has returned 22.5% in the three years to 9 September versus a 20.7% gain in the benchmark.