Time Warner Deal Adds to AT&T's Heavy Debt Load

Buying Time Warner Inc. will make AT&T Inc. among the most heavily indebted companies on earth.

In a deal announced Saturday, AT&T agreed to pay $85.4 billion to buy the owner of CNN, HBO and TNT networks. Including debt, the value grows to $108.7 billion. And to finance the half-cash, half-stock deal, AT&T is taking on $40 billion of bridge loans.

AT&T, the largest nonfinancial corporate issuer of dollar-denominated debt, already has about $119 billion in net debt -- roughly double what it was five years ago. "This would put them, I think, within striking distance of the financials with respect to unsecured bond issuance," says Mark Stodden, a credit analyst at Moody's.

Mr. Stodden estimates the carrier's total debt load will grow to as much as $170 billion if the deal is approved. AT&T hasn't said precisely how much debt it plans to issue to fund the transaction, but estimates that by the end of the first year after the deal's close, net debt will be around 2.5 times its adjusted earnings, up from 2.24 times at the end of the third quarter.

Most recently, AT&T added to its debt when it bought the satellite-television operator DirecTV last year. It also paid $18 billion for wireless airwaves licenses during a 2015 government auction and spent roughly $10 billion buying its own shares in 2014. More spending is on the horizon tooas the carrier is currently participating in a government auction of wireless airwaves.

AT&T said in its statement Saturday that it expected it would preserve its investment-grade rating. "AT&T has a very sound balance sheet and our cash generation is strong," a company spokesman said Sunday. "We're confident in our ability to execute."

Moody's Investors Service downgraded AT&T in January 2013 and again in February 2015. Its current rating at Moody's is Baa 1, the third-lowest investment grade notch. "You could potentially see further pressure on the rating because of this mega deal," Mr. Stodden said. The ratings agency has yet to make a formal determination.

Further downgrades would make it more expensive for AT&T to borrow money and could send shock waves around debt markets. Meanwhile, issuing additional debt will test the appetite of many bondholders who already own chunks of AT&T debt.

After the deal, AT&T will likely have annual debt maturities of more than $9 billion, Mr. Stodden estimates.

If approved, though, the deal could help improve AT&T's dividend coverage, which is one of the main reasons investors favor the stock. If the business performs poorly in the future, the strong dividend also serves as a last line of defense AT&T could tap into if it needs to pay its debt and avoid junk status.

Acquiring Time Warner will diversify AT&T's revenue mix -- some 40% will now come from its entertainment business. Time Warner will represent about 15% of the overall company's revenue, AT&T said.