Feb. 10 (Bloomberg) -- Cisco Systems Inc., taking advantage of loosening credit markets, completed the second bond offering in its 25-year history as it looks for ways to reduce expenses amid a slump in demand for networking equipment.

The $4 billion bond sale will be used to repay $500 million of floating-rate notes maturing this month, the San Jose, California-based company said yesterday. Cisco, the world’s largest maker of networking equipment, said the proceeds will also go toward general corporate purposes.

Chief Executive Officer John Chambers is taking advantage of a more plentiful supply of credit to lower borrowing costs and boost Cisco’s cash. The company is working to eliminate at least $1 billion in expenses by the end of July. Sales may drop as much as 20 percent this quarter, and analysts don’t expect a rebound until 2010.

“They’re making considerable cost cuts in light of reduced revenue,” said Erik Suppiger, an analyst at Signal Hill Capital Group LLC in San Francisco. “They also see an opportunity to refinance at a better interest rate. Debt is going to be less expensive than equity, certainly at these prices.”

U.S. companies sold $181.7 billion of bonds this year through yesterday, up 42 percent from the same period last year. Yields over benchmark rates on investment-grade and high-yield debt have dropped to their lowest levels since October as investor demand for corporate debt pushes down borrowing costs.

Yields Fall

The average yield over benchmark rates on U.S. corporate bonds narrowed almost 1 percentage point to 706 basis points this year through yesterday, according to Merrill Lynch & Co.’s U.S. Corporate & High Yield Master index. A basis point is 0.01 percentage point.

Lower borrowing costs have prompted creditworthy companies to refinance debt or build up war chests to make acquisitions and protect themselves from the global economic slowdown. Caterpillar Inc., the world’s largest maker of bulldozers and excavators, sold $3 billion of bonds last week, its largest ever bond sale. The transaction put the Peoria, Illinois-based company in a better position to cover $14 billion of debt coming due in the next 12 months.

Novartis AG, Switzerland’s second-biggest drugmaker, also sold $5 billion of bonds last week to bolster its cash pile for acquisitions. Chief Executive Officer Daniel Vasella said last month that the Basel, Switzerland-based drugmaker is planning to buy smaller companies and invest in research.

More Acquisitions

At Cisco, the added cash may help fund more acquisitions. The company, which had $29.5 billion in cash at the end of the last quarter, bought at least seven companies last year and currently has a “good pipeline” of potential acquisitions, Chambers said last week on a conference call.

The company said in a statement yesterday that general corporate purposes may include stock buybacks, debt repayment, acquisitions, investments, capital expenditure and advances to subsidiaries. Cisco’s main business is routers and switches, which direct and control the flow of data over networks.

Cisco’s last debt offering was in 2006. It helped pay for the $6.9 billion takeover of Scientific-Atlanta Inc., a maker of television set-top boxes.

Cisco fell 80 cents, or 4.8 percent, to $16.05 in Nasdaq Stock Market trading at 4 p.m. New York time. The shares dropped 40 percent last year.

Cisco Bond Sale

Yesterday’s sale included $2 billion of 4.95 percent 10-year notes that priced to yield 200 basis points more than U.S. Treasuries of similar maturity.

Cisco also sold $2 billion of 5.9 percent 30-year bonds that priced at a spread of 225 basis points over Treasuries, according to data compiled by Bloomberg.

Cisco’s Chambers declined to comment on the company’s debt issue at a press conference today in Mumbai where Cisco and Tata Consultancy Services Ltd. announced a plan to jointly develop software services.

Moody’s Investors Service rates Cisco’s senior notes A1, the fifth-highest level of investment quality. They carry an equivalent A+ grade from Standard & Poor’s.

Cisco hired Bank of America Corp., Goldman Sachs Group Inc. and JPMorgan Chase & Co. to help sell the debt.

To contact the reporters on this story: Joseph Galante in San Francisco at jgalante@bloomberg.net; Gabrielle Coppola in New York at gcoppola@bloomberg.net

Last Updated: February 10, 2009 16:45 EST