Microsoft Record-Low Coupon Punishes Investors: Credit Markets

Microsoft Record-Low Coupon Punishes Investors
The Microsoft campus in Redmond, Washington. Photographer: Kevin P. Casey/Bloomberg

Investors that helped companies from Microsoft Corp. to Wal-Mart Stores Inc. sell bonds at record-low borrowing costs are being punished on concern Federal Reserve efforts to stave off deflation will drive up yields.

“You kind of have come up to a buyers’ strike or buyers’ sensitivity,” in terms of low-coupon debt, said Thomas Chow, a money manager at Philadelphia-based Delaware Investments, which oversees $120 billion of fixed-income assets. “Higher yield and higher coupons offer some protection from rising rates.”

Debt from Wal-Mart, Microsoft and Coca-Cola Co. sold in the past two months with relative yields as low as 25 basis points is trailing investment-grade credit that pays an average spread of 175 basis points. Goldman Sachs Group Inc. is urging investors to buy bonds with spreads at least 200 basis points above U.S. Treasuries as the Fed seeks to purchase $600 billion of government debt to avert deflation and expand the economy.

Redmond, Washington-based Microsoft’s $1 billion of 10-year, 3 percent notes have fallen 1.95 cents on the dollar from their Sept. 22 issue to 97.19 cents as of Nov. 18, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The 2 percent loss on the top-ranked debt compares with a 0.2 percent decline for investment-grade bonds since Sept. 23, Bank of America Merrill Lynch index data show.

Buying Opportunity

Price declines in the bonds of some of the world’s highest-rated companies are an opportunity to buy the securities as a hedge against contagion from Europe’s debt crisis, which may weaken the Treasury market, said Jason Weiner, a senior fixed-income fund manager in Milwaukee at M&I Investment Management Corp.

“At some point, what’s going on in Ireland, Greece, Portugal and other sovereign-risk countries out there could infect the U.S. Treasury market on the basis we issued too much debt and we’re no longer a safe haven,” he said.

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar-maturity government debt rose 1 basis point to 166 basis points, or 1.66 percentage point, down from this year’s high of 201 basis points on June 11, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.63 percent.

Relative yields on U.S. investment-grade bonds were unchanged yesterday at 175 basis points, according to Bank of America Merrill Lynch’s U.S. Corporate Master Index. Spreads have declined 2 basis points this month.

Default Swaps Rise

The cost of protecting bonds from default in the U.S. rose for a second day to the highest level in a week. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 2.8 basis points to a mid-price of 93.8 basis points as of 12:56 p.m. in New York, according to index administrator Markit Group Ltd.

The index, which typically rises as investor confidence deteriorates and falls as it improves, ended Nov. 19 at 89.8 basis points. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Performance Food Group Co., the food distributor owned by Blackstone Group LP, pulled its proposed $550 million note sale citing “adverse market conditions,” according to a person familiar with the transaction. The company was marketing seven-year notes, said the person, who declined to be identified citing lack of authorization to speak publicly.

National Amusements

National Amusements Inc., the movie theater company controlled by Sumner Redstone, plans to sell $390 million of seven-year senior secured notes, according to a person familiar with the transaction. The debt may be issued as soon as next week, said the person, who declined to be identified because terms aren’t set. The bonds may be sold through the company’s NAI Entertainment Holdings LLC unit with proceeds used to refinance a credit facility, the person said.

Since July, companies from McDonald’s Corp., the world’s largest restaurant chain, to drugmaker Johnson & Johnson, sold debt at record low borrowing costs as investors priced in a slower economic recovery and the Fed held interest rates near zero.

Microsoft, rated Aaa by Moody’s Investors Service and AAA by S&P, obtained the second-lowest borrowing costs for 10-year debt, after Johnson & Johnson and Colgate-Palmolive Co., Bloomberg data show. Investor demand and record-low yields on investment-grade debt helped the world’s largest software maker issue the securities in its second bond offering.


Wal-Mart, the world’s largest retailer, sold $750 million of 0.75 percent bonds on Oct. 18 at the lowest borrowing cost for three-year notes, according to Bank of America Corp., which helped manage the offering. The notes lost 0.41 cent on the dollar to trade at 99.24 cents as of Nov. 18, Trace data show.

Their 0.4 percent decline since they were sold compares with the 0.02 percent gain on investment-grade corporate bonds due in one to three years, Bank of America Merrill Lynch index data show.

Bonds with low coupons are suffering because too many hedge funds and “fast-money flippers” purchased the securities, instead of investors who typically buy and hold the debt, said Tim Doubek, a portfolio manager who helps oversee more than $22 billion of investment-grade credit at Columbia Management in Minneapolis.

‘Lumber Around’

“You’re just finding people want to sell them right around where they were issued, and they really can’t interest any buyers because a large portion of the buyer base of that new issue is trying to do the same thing,” he said. “It’s going to be one of those markets where the high-quality new issues lumber around where they came or widen and you’ll see really, really good deep bids for lower-quality names.”

Spreads in 2011 are likely to tighten most on debt from high-quality financials, low-quality non-financials and bonds maturing between five and seven years, Goldman strategists Charles Himmelberg, Alberto Gallo, Lotfi Karoui and Annie Chu wrote in a Nov. 19 report.

“Our rates team expects long-dated Treasuries to move higher on economic recovery, both in the U.S. and globally, and the normalization of U.S. inflation expectations, with yields on the 10-year rising to 3.3 percent by the end of 2011,” the strategists wrote. “We expect total returns on tight-spread credit to underperform accordingly, with high-quality names suffering the most.”

Coca-Cola Bonds

Coca-Cola’s 0.75 percent, 3-year notes issued on Nov. 4 at 99.953 cents on the dollar, tying Wal-Mart’s record, traded at 99.382 cents as of 12:06 p.m. in New York, Trace data show. The $1.25 billion of debt from the world’s largest soft-drink maker has lost 0.8 percent since issue, compared with the 0.28 percent decline on investment-grade corporate bonds due between one and three years during the same period, Bank of America Merrill Lynch index data show.

Weiner, whose firm oversees about $32 billion, including the Microsoft securities issued in September, says he will consider purchasing some of the low-coupon debt from companies such as International Business Machines Corp. of Armonk, New York, and Microsoft, if they continue to decline.

“People are willing to buy IBM and Microsoft and other corporations that have really solid balance sheets and adds diversification away from Treasuries,” he said.

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