Microsoft Pays Higher Rate to Beat Apple Sale: Corporate Finance
The company, one of four U.S.-based businesses with the highest ratings from Moody’s Investors Service and Standard & Poor’s, issued $1.95 billion of dollar-denominated debt last week with a weighted average coupon of 2.41 percent, exceeding the 2.33 percent for similar bonds it sold five months earlier even with interest rates at about the same level. The latest sale came two days after Apple said it would use debt to help fund a $55 billion addition to a plan to return cash to shareholders.
“Microsoft paid a little more than they otherwise would, given the looming Apple issuance,” said Noel Hebert, the chief investment officer at Concannon Wealth Management, which oversees about $250 million of assets from Bethlehem, Pennsylvania. “The higher coupons are likely a fair trade to get in front of the new Apple paper, which will have to get digested.”
While the world’s largest software maker has a higher credit rating than Apple, growth at the Redmond, Washington- based company has stagnated for more than a decade. After generating enough free cash flow in 1999 to buy Apple twice over, Microsoft’s $27.5 billion of funds earned in the last 12 months now accounts for about 60 percent of the amount produced by its Cupertino, California-based competitor.
Even as European investors simultaneously awarded the Windows 8 designer an unprecedented 2.625 percent 20-year coupon on its first ever euro-denominated debt, it cost Microsoft more to place dollar notes with buyers who are expecting potential Apple issuance through 2015 to be more than 25 percent of outstanding U.S. investment-grade technology bonds.
Tony Imperati, a Microsoft spokesman, declined to comment on whether Apple influenced the timing of Microsoft’s debt offering. Steve Dowling of Apple declined to comment on a potential bond sale by the iPhone maker, which last sold convertible debt in 1996 and straight bonds in 1994.
Apple asked Goldman Sachs Group Inc. and Deutsche Bank AG to arrange phone interviews with fixed-income investors today in advance of a potential deal, according to a person familiar with the offering who asked not to be identified because the terms aren’t set.
The Windows maker “wanted to front-run them so they didn’t overpay after Apple once all the accounts got filled,” Nikhill Patel, an analyst at San Antonio-based Frost Investment Advisors LLC, which oversees $9 billion, said in a telephone interview. “With $55 billion in total issuance over three years, from a highly rated and highly regarded technology company such as Apple, it’s a lot for the market to stomach.”
Microsoft sold $450 million of 1 percent, five-year bonds, $1 billion of 2.375 percent debt due 2023 and $500 million of 30-year securities with a coupon of 3.75 percent, according to data compiled by Bloomberg. Those notes had higher coupons and wider spreads that those linked to similar portions of bonds the company issued Nov. 2.
The 10-year debt that Microsoft sold in November was sold with a 2.125 percent coupon at a 47 basis-point spread, while the corresponding maturity in last week’s sale was priced at a relative yield of 70 basis points. A basis point is 0.01 percentage point.
Yields on 10-year U.S. Treasuries (USGG10YR) were 1.71 percent on April 25, when the new bonds were sold, compared with 1.72 percent on Nov. 2, the date of the previous issue. Yields on investment-grade bonds fell to 2.69 percent from 2.77 percent over that span, according to the Bank of America Merrill Lynch U.S. Corporate Index.
Microsoft also raised 550 million euros ($716 million) in its latest sale, an offering for which demand from European money managers, insurance companies and pension funds reached 7 billion euros.
“It has the benefit of being a scarce credit in quite a wide universe,” said Craig Veysey, the head of fixed income at Sanlam Private Investments Ltd. in London, part of the Sanlam Group, which oversees $72 billion of assets. “The U.S. dollar issuance from Microsoft didn’t have the same scarcity value as the euro tranche.”
Apple is poised to exploit scarcity value as it prepares to finance part of a $100 billion shareholder reward package with debt. Nike Inc. (NKE), which before last week hadn’t sold new bonds since 2003, raised $1 billion with 10- and 30-year securities on April 23 that pay less that Microsoft even though the sporting- goods company is ranked four levels lower, with an A1 grade from Moody’s and A+ at S&P.
With Microsoft, “people can probably get a pretty decent fill and may already have enough exposure,” Lon Erickson, a Santa Fe, New Mexico-based money manager at Thornburg Investment Management Inc. who oversees about $6 billion of taxable fixed- income assets, said in a telephone interview. “They don’t necessarily need to go into the market full force like they would with something like Nike or, clearly, Apple.”
Microsoft’s sale may precede a series of Apple offerings that CreditSights Inc. estimates could be between $15 billion and $20 billion annually over the next three years. Using bonds to finance the additional cash Apple plans to use to enrich shareholders stands to swell the $187 billion market for U.S. investment-grade technology debt by about 30 percent, Bloomberg data show. Apple is rated Aa1 at Moody’s and AA+ by S&P.
“Presumably the same investors that are going to play in the Microsoft deal are going to play in Apple, and diversity is always better,” said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia.
While Apple’s 39 percent stock plunge from its September high reflects investor concern that the company’s pace of sales growth is slowing amid accelerating competition in mobile devices from Samsung Electronics Co., Microsoft is contending with its own challenges.
The company reported no growth in Windows sales in its latest quarter, after accounting for upgrades sold in the past, and is struggling to end its reliance on traditional computing as consumers and businesses flock to mobile devices. Its bond prices imply a rating of A1, data from Moody’s Analytics show.
Cost controls and sales of business and server software have helped boost profit beyond analyst estimates and blunt the impact of plummeting personal computer shipments amid weak demand for Microsoft’s newest operating system. While last week’s offering cost more than Microsoft’s previous sale, its average coupon was still below the average 2.95 percent for its $16.9 billion of bonds outstanding, Bloomberg data show.
“They may have had to pay up for it a little bit in order to entice people to come into this in addition to waiting to buy Apple,” Thornburg’s Erickson said. “At the same time, it’s quite cheap money.”
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