AT&T; Bonds: Individuals May Not Be Missing Out on Much

NEW YORK —  AT&T; Corp. plans to offer a record-setting $7 billion in long-term bonds for sale today, but there still probably won’t be enough to share with yield-hungry individual investors.

Big institutional investors are expected to snap up all of the bonds. In fact, underwriters Merrill Lynch and Salomon Smith Barney last week said they already had $11.5 billion in orders.

As it is, today’s sale will eclipse last summer’s $6.1-billion bond deal by WorldCom Inc. as the biggest corporate bond issue ever.

Even if the AT&T; bonds were easy to find, individuals might think twice before buying them.

“They don’t look expensive, but they don’t look cheap,” said Marilyn Cohen, head of Envision Capital Management in Los Angeles.

The AT&T; bonds will be sold in three maturities. The $1.75 billion of five-year bonds are expected to yield 0.64 or 0.65 percentage point over U.S. Treasury securities of the same maturity. With five-year Treasury notes at 5.12% as of Monday, the AT&T; issue should yield about 5.76%, annualized.

Also to be sold: $2.5 billion of 10-year bonds, at 0.84 or 0.85 point above Treasuries, and $2.75 billion of 30-year bonds, at 0.94 or 0.95 point above Treasuries. That should mean yields of about 6.04% and 6.51% on the AT&T; bonds, respectively.

Those yields may look appealing, but Cohen says that for her wealthy clients, most of whom are in the top tax bracket, an AT&T; five-year bond yielding 5.76% offers little after-tax advantage over Treasuries. That’s because corporate bond interest is taxable at both the federal and state level, whereas Treasury interest is exempt from state income tax.

After-tax, the AT&T; yields are “just a dot better, and I need to be a lot better than a dot better,” Cohen said.

Overall, there is a shortage of high-quality bonds in the market today for several reasons. The Treasury itself is issuing less debt, thanks to the federal budget surplus. Also, the booming stock market makes it cheaper for many companies to issue equities instead of bonds to raise capital.

Third, last summer’s Russian bond default drove up corporate bond yields in general. Although yields have come down since, they’re still higher than what many companies want to pay.

The result: According to research firm Securities Data Corp., $162.3 billion worth of investment-grade bonds have been issued so far this year, 9.5% less than last year at this time.

John Burgess, chief bond strategist at Bankers Trust, doubts the AT&T; offering is a harbinger of a new wave of corporate bond offerings. Unless the stock market weakens considerably, “equity is still the best currency” for acquisitions and other major financing needs, Burgess said.

AT&T;’s debt is rated A1 by Moody’s Investors Service and AA- by Standard & Poor’s.

Cohen said she sees better value for individuals in recent bond offerings by Citigroup, Chase Manhattan, Lehman Bros. Holdings and--among firms “on the cusp” between investment-grade and junk bond status--Occidental Petroleum.

Westwood-based Oxy, for example, has a seven-year bond currently yielding 6.90%, more than 1.5 percentage points above comparable Treasuries.

It has long been difficult for small investors to obtain the best yields or other information when buying individual bonds, but that is changing, Cohen said.

Many brokerages now offer online comparison shopping for bonds, she noted.

Richard Lehmann, president of the Bond Investors Assn., offered a word of caution, however. Comparisons offered by some online services are “built on the presumption that ratings are the only thing that matters,” he said. Some equally important considerations, such as the “call” provisions of a bond issue, may not be given, he said.

“You could buy a [long-term] bond and have it called out from under you in two months,” he said.