By Danielle Robinson
NEW YORK (IFR) - Microsoft took a leaf out of Apple's playbook on Monday and issued a US$10.75bn bond issue - the biggest so far this year - in part to return money to its shareholders.
The deal, also Microsoft's biggest, was increased from an originally indicated US$7bn, after the world's only Triple-A rated tech company was inundated with around US$37bn of demand.
The offering comes just a week after Apple waded into the dollar market with a US$6.5bn offering, its third in as many years to pay for share buybacks.
Both have taken advantage of huge investor demand worldwide for high quality corporate bonds at a time when government bond yields have plunged because of quantitative easing policies.
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Debt has essentially become so cheap, that corporates like Microsoft are preferring to load up on bonds rather than use cash.
"Though Microsoft maintains ample reserves to fund these repayments internally, we believe bond market conditions remain attractive for high quality issuers," said Michael Dimler, tech analyst at Morningstar.
Microsoft has about US$8bn of cash and other highly liquid instruments domestically, with the rest of its total US$90bn cash pile sitting overseas, according to Moody's.
But with Treasury yields at such historically low levels, Microsoft has been able to lock in some of the lowest costs it has yet achieved for maturities 20 years and longer.
To make the most of the low rates, Microsoft issued the majority of its deal in maturities of 20 years and longer.
Out of the US$10.75bn, US$1.5bn was issued in five-year maturities, US$1.5bn in seven, US$2.25bn in 10, US$1.5bn in 20, US$1.75bn in 30 and US$2.25bn in 40-year paper.
Apple timed its own deal perfectly. By coming on a day when the 30-year Treasury closed at its lowest on record, at 2.25%, Apple locked in a 3.45% coupon on a US$2bn 30-year.
Since then the 30-year's yield has widened about 25bp, which could leave Microsoft with a slightly higher coupon on its 30-year than Apple.
Microsoft however, has maximised its ability to take advantage of low rates, by including several long-dated tranches and is paying barely 5bp of extra spread over what investors consider to be fair value.
The deal, however, could end up being done at the expense of its highly coveted Triple-A rating with Moody's.
On hearing of the deal, Moody's raised a red flag to Microsoft, warning that its Aaa rating could come under pressure if it uses the bulk of the proceeds for share buybacks.
Stock buybacks was just one of a wide range of things Microsoft has said it will used the proceeeds.
Microsoft launched the deal at a spread of 35bp on the five-year, 60bp on the seven, 75bp on the 10, 103bp on the 20, 123bp on the 30 and 153bp on the 40-year.
Bank of America Merrill Lynch, Goldman Sachs, HSBC, JP Morgan, RBS and Wells Fargo are passive bookrunners on the deal.
(Reporting by Danielle Robinson; Editing by Natalie Harrison, Shankar Ramakrishnan)
