The Zhitong Finance App learned that Morgan Stanley said in the latest report that it has officially closed AT&T (T.US) “10s/30s” curve steep transactions, that is, buying 4.9% coupon interest, bonds due in 2035, selling bonds with 5.7% coupon interest, and bonds due in 2054. The combined spread has steeply climbed from about 30 basis points in December last year to about 55 basis points. As supply pressure on ECHO bonds subsided, profit margins were largely realized, and Damo chose to settle down.
David Hamberg and his team of analysts said that although the financing pressure brought about by the Echo Spectrum acquisition has passed, high leverage and limited debt reduction are still hidden concerns for AT&T's credit.
In July 2026, AT&T completed the acquisition of Echo's mid-band 5G spectrum for $23 billion, which was the direct trigger for a short-term jump in its leverage. After the acquisition was completed, the net leverage ratio increased from 2.68 times in the second quarter to 3.13 times, slightly lower than management's expectations of about 3.2 times. Management is still maintaining its goal of reducing leverage to around 2.5 times in 2029.
In terms of performance, AT&T handed over a mixed report card. Adjusted EBITDA for the third quarter was US$12.5 billion and free cash flow of US$5 billion, all exceeding expectations; however, the net increase of postpaid mobile phones was only 379,000, which fell short of expectations, while the net increase of 416,000 households with fiber-optic broadband and 280,000 fixed wireless access was impressive. The average revenue per user of fiber-optic broadband fell by about 4% year on year, indicating that AT&T is sacrificing short-term pricing in exchange for user growth, and competition in the industry is intensifying; ARPU for post-paid phones has increased by 4%, and the stable wireless loss rate provides a certain buffer.
Between shareholder returns and deleveraging, the balance clearly favors the former. AT&T has reaffirmed its 2026 repurchase target of approximately $10 billion, has repurchased $2.8 billion in the third quarter, and maintained a free cash flow guideline of over $18 billion for the whole year. The company also lowered its 2027 and 2028 capital expenditure guidelines by about $1 billion to $22 billion to $23 billion, but the free cash flow guidance remains unchanged, meaning that the savings will mainly be used to pay higher interest and customer acquisition costs rather than accelerate deleveraging. Additionally, management continues to maintain a high cash reserve of nearly $12 billion, but the reason for maintaining such a high level of cash is unclear.
Positive signals also exist. Management emphasized fiber cooperation with Amazon Web Technology and Microsoft as an opportunity to capture AI connectivity needs and support the long-term value of network investment; the fiber-optic joint venture and the proceeds from the sale of Mexican assets are also expected to help deleveraging in 2027.
Overall, Damo's attitude towards AT&T credit can be summed up as neutral and cautious. In the future, we need to keep an eye on when optical fiber ARPU will bottom out, whether the net increase in postpaid phones will pick up, whether capital expenditure cuts can actually be translated into improved leverage, and whether AI connectivity demand can be fulfilled as scheduled.