Microsoft May Use Debt Sale to Reward Shareholders
Proceeds may be used for working capital, stock buybacks and acquisitions, the Redmond, Washington-based company said today in a regulatory filing. Microsoft is offering 5-, 10- and 30-year senior unsecured debt, according to a person familiar with the transaction.
2011 is “going to be more the year of the shareholder than the year of the bondholder,” said Tom Murphy, a money manager who helps oversee about $23 billion of investment-grade credit at Columbia Management in Minneapolis. “Some companies are going to be taking that treasure trove of cash they have and rewarding shareholders, whether it’s through share buybacks, dividends, or doing strategic M&A transactions.”
Credit quality will weaken among investment-grade issuers this year as companies facing “limited” business opportunities, take advantage of relatively low interest rates to repurchase stock, according to Janney Montgomery Scott LLC. Bonds issued by Microsoft in its last U.S. offering in September have tumbled, while the company’s shares have climbed 14.4 percent.
In today’s offering, a $750 million portion of 5-year notes may pay 38 basis points more than similar-maturity Treasuries, $500 million of 10-year debt may pay 48 basis points more than benchmarks and $1 billion of 30-year bonds may pay a spread of 68 basis points, said the person familiar with the offering, who declined to be identified because terms aren’t set.
The extra yield investors demand to own industrial investment-grade debt instead of Treasuries fell to 137 basis points on Jan. 24, the tightest spread since May, according to Bank of America Merrill Lynch index data. The spread was 138 basis points yesterday.
Microsoft, one of four non-financial U.S. companies with AAA ratings, issued $4.75 billion of debt in September, including 3- and 5-year notes that set records for the lowest coupons for those maturities.
The offering included $1 billion of 3 percent, 10-year notes that priced at 99.14 cents on the dollar to yield 55 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. The notes have dropped to 93.1 cents as of yesterday to yield 3.86 percent, or a spread of 36.5 basis points, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The company’s 10-year notes lost 5.8 percent since their first full day of trading on Sept. 23, compared with the 1.73 percent loss on its $1.75 billion of 1.625 percent, 5-year notes, Bloomberg data show. Bonds rated AAA have lost 2.82 percent since then while overall investment-grade bonds have declined 1.4 percent, Bank of America Merrill Lynch index data show.
The maker of Windows and Xbox repurchased $5 billion of shares and declared $1.3 billion of dividends in the quarter ended Dec. 31, the company said in a Jan. 27 earnings call.
The Microsoft bonds fell because the extra yield the debt pays relative to Treasuries offers little protection as a “shock absorber” to rising interest rates, said William Larkin, a fixed income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which manages $500 million.
“I would look at this as super expensive,” Larkin said in a telephone interview. “As inflation expectations shift and as Treasuries sell off, basically Microsoft bonds will lose value.”
Bank of America Corp. and Credit Suisse Group AG are managing today’s offering, said the person familiar with the issue. Today’s filing didn’t include the size or maturities of the sale.
“Investment-grade issuers are beginning to re-leverage their balance sheets after cutting debt in 2008 through early 2010,” Guy LeBas, strategist and economist at Janney Montgomery Scott wrote in the broker-dealer’s 2011 outlook on Dec. 20.
Corporate cash balances are at record highs, close to 7 percent of total assets, Barclays Capital said in its global credit outlook report for 2011.
“I don’t necessarily think it’s such a terrible thing for us, because we’re starting from such a position of strength from a balance sheet perspective,” Columbia Management’s Murphy said of bond sales fueling buybacks and acquisitions.
Standard & Poor’s and Moody’s Investors Service also rank Exxon Mobil Corp., Johnson & Johnson and Automatic Data Processing Inc. as AAA, or an equivalent Aaa, the same level they assign to U.S. government debt.
Kimberly-Clark Corp., the maker of Huggies Diapers and Viva paper towels, sold $700 million of bonds on Jan. 27 that may be used to buy back common stock, fund the company’s pension plans, and redeem outstanding commercial paper, according to a statement from the Dallas-based company.
Moody’s assigned an Aaa to the Microsoft offering, the ratings company said today in a note.
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