Microsoft Favors Europe for Record Bond Sale: Corporate Finance

Microsoft Corp., which issued the first euro-denominated bond in its 38-year history in April, is favoring the currency in its biggest sale ever, taking advantage of a widening discount to dollar borrowing costs.

The world’s largest software maker sold 3.5 billion euros ($4.8 billion) of bonds yesterday to account for more than half of an $8 billion issue. Corporations are paying 1.13 percentage points less to borrow in euros than dollars for debt of five to 10 years, according to data compiled by Bloomberg. Two years ago, the relationship was reversed, with euro yields eclipsing dollar rates by 1.2 percentage points.

When Microsoft sold notes in April, the discount was only 0.47 percentage point, and the company’s debut euro bond comprised about a quarter of a $2.67 billion issue. The Redmond, Washington-based company’s newest offering adds to about 40 billion euros of issuance by American companies in 2013, almost double the amount sold in 2012, as the European Central Bank cuts interest rates.

“You’ve got a confluence of events between monetary policy, interest rates and overall demand from investors, and an improving basis, all of which has made it very attractive to issue in euros,” said Jim Glascott, head of global debt capital markets at Barclays Plc, which helped manage the Microsoft offering. “The demand and the attractiveness of euros is something that’s definitely going to affect volumes in 2014.”

Enel, Pfizer

Microsoft’s deal in the European currency is the biggest offering since Enel SpA, Italy’s largest power utility, raised 4 billion euros in September 2009, Bloomberg data show. It’s also the largest for a U.S. company in euros since Pfizer Inc., the world’s biggest drugmaker, raised 5.9 billion euros in May 2009.

The maker of the Windows operating system split its euro sale into two pieces, issuing 1.75 billion euro portions of 2.125 percent notes due in 2021 and 3.125 percent bonds maturing in 2028, Bloomberg data show.

That means Microsoft is paying an average 2.625 percent to borrow for 11.5 years, a full percentage point less than the 3.625 percent coupon on its $1.5 billion of 10-year dollar notes, Bloomberg data show. The dollar offering also included $1.25 billion of 1.625 percent five-year bonds and $500 million of 4.875 percent debentures due in 2043.

‘Much Cheaper’

“The euro market is much cheaper than the dollar market today,” said Microsoft Treasurer George Zinn in an e-mailed response to questions. “We are being opportunistic and looking at rates across the globe. We can use the proceeds from these bonds for any general, domestic purpose.”

The cost to exchange euros into dollars with five-year cross-currency basis swaps dropped to a five-year low on Oct. 30 at 11.3 basis points below the euro interbank offered rate. The price is now 15.5 basis points below the benchmark, less than an average 42 basis points in 2012.

Microsoft may find it attractive to exchange euros for greenbacks in an effort to bolster a domestic cash hoard that accounted for less than 6 percent of the company’s $80.7 billion of funds on Sept. 30, according to an Oct. 24 regulatory filing. By borrowing the money rather than moving foreign holdings to the U.S. to pay for increased dividends, stock buybacks or acquisitions, companies such as Microsoft can potentially sidestep taxes.

Repatriation Tax

U.S. companies can defer federal income taxes on most overseas earnings indefinitely. When they do return the profits to the U.S., they’re taxed at the corporate rate of 35 percent, with credits for foreign income taxes paid. Companies paying little in overseas levies may save money by borrowing instead.

“They’re looking at potentially needing to have some more domestic cash on hand and not wanting to have to pay taxes to repatriate cash,” said Michael Hodel, an analyst at Morningstar Inc. in Chicago.

Microsoft announced a new $40 billion stock buyback plan and increased its quarterly dividend 22 percent in September as it sought to reward shareholders amid a change in leadership and strategy.

The company’s board is working to replace Chief Executive Office Steve Ballmer, who announced his plan to retire within a year in August. The board is focusing on a list of candidates, which includes Ford Motor Co. Chief Executive Officer Alan Mulally and internal executive Satya Nadella, people familiar with the discussions said last week.

‘Clear Divergence’

Microsoft has also agreed to purchase Nokia Oyj’s handset business for $7.2 billion and is implementing a massive reorganization to shift focus to hardware and Internet-based services.

The software maker, which had $15.9 billion of debt on Sept. 30, along with Johnson & Johnson, Exxon Mobil Corp. and Automatic Data Processing Inc., has the highest ratings from Moody’s Investors Service and Standard & Poor’s.

Microsoft’s biggest bond sale, which exceeded a $4.75 billion offering in September 2010, comes as economists forecast the U.S. Federal Reserve will curtail its $85 billion in monthly bond purchases in March. Meanwhile, ECB officials have said they still have options for easing monetary policy after the bank cut its benchmark interest rate to record low of 0.25 percent last month.

“There is a clear divergence in central bank policy with the U.S. considering tapering whereas in Europe we’re still in monetary-easing mode,” said Geraud Charpin, a fund manager at Bluebay Asset Management Ltd. in London, which oversees $55 billion. “The U.S. market is saturated, and companies can diversify by issuing in euros.”

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