Microsoft is set to issue nearly $4bn of debt in its first bond offering. That will pique the interest of credit markets. Yet companies with a $170bn market value, prodigious cash flows and no debt are hard to come by. The rapturous reception the bonds will receive says more about Microsoft than it does about the state of the markets.
The fact that the company is even selling debt is surprising to long-time investors and a sign of its increasing maturity. It’s a marked departure from Microsoft’s habit of letting cash pile up on its balance sheet and shunning borrowing. Technology companies tend to embrace this strategy because it protects them against the risks of sudden technological shifts.
But the demand for the offering shouldn’t come as a surprise. For one, the company’s triple-A debt rating stands out amid a sea of angels that have lost their vaunted credit ratings amid the financial downturn, including Berkshire Hathaway and General Electric. Indeed, Microsoft’s huge market capitalisation and nearly $20bn of annual free cash flow puts it in a league of its own.
And it makes sense for Bill Gates’ brainchild. It’s borrowing at a small spread over the London interbank offered rates, and interest payments are tax deductible. So the company is boosting its cash on hand to some $29bn without breaking a sweat. Indeed, the deal may even lower its tax rate.
What it will do with a piggy bank that large is anyone’s guess. One clue might lie in the fact that its stock has fallen by a third over the past year, making it cheaper than the last time it went on a big buyback spree. Whatever its plans are, the debt offering behind them is far from a harbinger on the health of the credit markets.
