Low rates spur $10.75B Microsoft bond sale
Microsoft’s biggest bond issue to date, with maturities ranging from five to 40 years, will help the cash-rich software giant defer taxes as it pays dividends and buys back shares.
Seattle Times technology reporter
Microsoft took out the biggest package of loans in its history, capitalizing on low interest rates to borrow cheaply to pay for share buybacks and dividends.
Microsoft sold bonds worth $10.75 billion on Monday, the company said. The sale is the first time Microsoft has tapped long-term debt markets since a company-record $8 billion bond sale in December 2013.
The company isn’t short of cash. Microsoft held $90 billion in cash and short-term investments at the end of December.
But the Redmond company, like many U.S. companies with a global reach, holds much of its money offshore to avoid paying a U.S. corporate tax rate that is among the highest in the world.
In borrowing domestically, companies determine that it’s cheaper to fund their operations by paying interest on debt than it would be to rely on repatriated cash taxed at the 35 percent corporate rate. Microsoft rival Apple borrowed $6.5 billion last week.
“When you have tech companies that are cash-rich, it’s fairly common that they issue debt because they don’t want to pay taxes,” said David Tsui, an analyst with Standard & Poor’s Ratings Services.
Tsui said S&P’s sterling AAA rating on Microsoft’s debt wasn’t endangered by the new borrowing. “My sense is they’re not going to do anything to jeopardize their rating,” he said.
Microsoft, oil and natural-gas producer Exxon Mobil and health-care conglomerate Johnson & Johnson are the only U.S. companies that carry S&P’s highest rating. S&P and ratings-service rival Moody’s Investors Service both assigned their top grades to the bonds Microsoft sold on Monday.
In a securities filing, Microsoft deployed the boilerplate language common when companies borrow, saying it would use the proceeds of the debt sale for general corporate purposes. That could include funding its operations or expansion projects, repurchasing its own shares and paying down existing debt, among other uses.
Microsoft has plenty of potential destinations for the cash.
The company said last month that it planned to spend the remaining $31 billion in its previously announced share-repurchase program by the end of next year. Funding the company’s 31-cents-a-share dividend requires an additional $10 billion a year.
Meanwhile, Microsoft is also spending about $6 billion a year in capital expenditures, chiefly on servers and other costs associated with building the data centers that power the company’s growing cloud-computing service.
Analysts with investment-bank Jefferies estimated earlier this year that Microsoft would raise $26.5 billion in debt over the next two years to fund its programs.
The company “has huge scale,” said John DiFucci, a managing director with Jeffries. “Can they raise that? Sure. Should it be a concern? It shouldn’t be at all.”
Microsoft's profitability is likely to decline in the years ahead, DiFucci said, but not to an extent that makes the company’s debt load look risky.
The company reported a profit of $22 billion in its most recent fiscal year, and its long-term borrowing at the end of December totaled $18.2 billion.
Monday’s debt sale was originally pegged at about $7 billion, Bloomberg News reported, but strong demand from investors prompted Microsoft to increase the size of the offering.
With sluggish global growth limiting the appeal of investment in stocks, investors have been clamoring to buy bonds from companies like Microsoft that seem to be safe bets to repay their debt.
Rock-bottom interest rates on government debt also make corporate debt that promises a higher yield more attractive.
Microsoft’s existing bonds maturing in 2020 yield 1.86 percent, according to Bloomberg data. U.S. government debt of a similar maturity, the ultrasafe benchmark, yielded 1.66 percent. Lower yields indicate higher prices.
The company, which turns 40 years old this year, historically avoided accumulating any long-term debt.
Microsoft’s first big long-term bond issue, worth $3.75 billion, was in 2009.
The bonds Microsoft sold Monday were broken up into six groups, ranging in maturities from five years to 40 years. They were priced at yields ranging from 1.85 percent on the notes due in 2020 to 4 percent on the bonds maturing in 2055.
Matt Day: 206-464-2420 or email@example.com. On twitter: @mattmday