Microsoft Announces Debt Offerings

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Microsoft Corp. on Monday announced the pricing of its offering of $10.75 billion of senior unsecured notes. The notes consist of the following tranches:
  • $1.50 billion of 1.850 percent notes due Feb. 12, 2020
  • $1.50 billion of 2.375 percent notes due Feb. 12, 2022
  • $2.25 billion of 2.700 percent notes due Feb. 12, 2025
  • $1.50 billion of 3.500 percent notes due Feb. 12, 2035
  • $1.75 billion of 3.750 percent notes due Feb. 12, 2045
  • $2.25 billion of 4.000 percent notes due Feb. 12, 2055
Microsoft intends to use the net proceeds from the offering for general corporate purposes, which may include, among other things, funding for working capital, capital expenditures, repurchases of capital stock, acquisitions, and repayment of existing debt. The offerings are expected to close on Feb. 12, 2015.
 
I don't really like Amy Hood on the conference calls, she sometimes sounds like she's holding in laughing at an inside joke during some of her comments which is obviously disturbing coming from a CFO. However, this debt offering makes all the sense in the world. The only way it would make more sense is if it were denominated in Euros or Yen.
 
Why Chinese Yen? Euros would give you a lower lending rate, but China would not. I think Prime is a full 2%+ higher in China than the US. I guess they are active there, and it would be a good part of their overall hedging efforts.

MS's debt to EBITDA and interest coverage indicate that they can easily take on this additional debt. And honestly, what a great time to raise debt. Their leverage isn't high, and with rates expected to go up this year, they seem to be getting while the getting is good.
 
Yay! More junk bonds to buy that give a lower return rate than the rate of inflation.

If you are really dumb, you can buy some that will not mature till your are dead or near death.
 
Yay! More junk bonds to buy that give a lower return rate than the rate of inflation.

If you are really dumb, you can buy some that will not mature till your are dead or near death.

You couldn't be more wrong. First off, MSFT's senior unsecured credit rating from both S&P and Moody's is the highest rating possible, at AAA. Junk bonds are classified as having a rating below "investment grade", which starts at BB+ on the S&P ratings scale. Hell, MSFT has a better credit rating than the US right now.

So these are the absolute opposite of "junk bonds" as they are at the tippy top of the ratings scale. Why does that matter? B/c the rating agencies look at a wide variety of factors that would determine if the company can repay that bond or not. Things like debt as a percent of total capitalization, how much your EBITDA covers your interest expense, etc etc. The company also hasn't tapped into the bond markets since 2013, so it's not like they're wracking up debt just to wrack up debt....I'd highly recommend educating yourself to at least a base level of understanding of finance if you're looking to invest in traded debt or equity. If you don't feel like getting your learn on, find some ETFS and invest that way.

And if you're investing properly for retirement, having at least a small portion of your investments in fixed income is a good thing, even at an early age. If the market crashes, all those pretty stocks fall with it. Bonds on the other hand......you're going to get your interest payments unless the company goes completely belly up. Secured and Unsecured debt holders have first rights in a liquidation event, meaning that the debt holders are usually made whole (or near to whole), and then the shareholders get the scraps.
 
Why Chinese Yen? Euros would give you a lower lending rate, but China would not. I think Prime is a full 2%+ higher in China than the US. I guess they are active there, and it would be a good part of their overall hedging efforts.

MS's debt to EBITDA and interest coverage indicate that they can easily take on this additional debt. And honestly, what a great time to raise debt. Their leverage isn't high, and with rates expected to go up this year, they seem to be getting while the getting is good.

Yen is the japanese currency
 
You couldn't be more wrong. First off, MSFT's senior unsecured credit rating from both S&P and Moody's is the highest rating possible, at AAA. Junk bonds are classified as having a rating below "investment grade", which starts at BB+ on the S&P ratings scale. Hell, MSFT has a better credit rating than the US right now.

Microsoft is using it's credit rating to borrow money at the lowest possible rates and because it can it's a cheaper way to get liquidity in the US than to repatriate offshore money that would incur taxes.
 
Microsoft is using it's credit rating to borrow money at the lowest possible rates and because it can it's a cheaper way to get liquidity in the US than to repatriate offshore money that would incur taxes.

I don't know a lot about finances but this seems very realistic.
 
Yay! More junk bonds to buy that give a lower return rate than the rate of inflation.

This is opposite of how it works, Junk bonds being junk would have to pay considerably more than inflation in order for investors to be willing to take the risk. AAA bonds from a company like Microsoft are considered essentially risk free thus payout considerably less than junk.
 
I don't know a lot about finances but this seems very realistic.

It's a bit counterintuitive because why would a company that's sitting on nearly $100 billion USD in cash need to borrow money? Borrowing often has tax advantages which is the case here. And since the cost of borrowing for them is so low because of their credit rating and current rates it's attractive to borrow now regardless.
 
Microsoft is using it's credit rating to borrow money at the lowest possible rates and because it can it's a cheaper way to get liquidity in the US than to repatriate offshore money that would incur taxes.

True. Though that's what any good investment grade company would do when rates are this low. I honestly don't follow the financial side of the tech market that much, but I can say without a doubt that commercial RE companies have tapped into a record amount of debt offerings over the last few years. Why? Rates have been at record lows, and they did a great job of cleaning up their balance sheets after the last market crash.

I've heard lots of theories on when should a company raise debt, with one very bright CFO telling me once basically, "when they can". Meaning, is the balance sheet able to handle more debt, and are rates such that this makes sense.
 
Yay! More junk bonds to buy that give a lower return rate than the rate of inflation.
Not that we can really predict inflation, but if we average out the last 10 years inflation and apply it to the next 10 years in bonds, I don't think we'd lose money. Inflation's been at ~2.3% for a decade now. (Exception '08, in which it was actually negative!)
 
It's a bit counterintuitive because why would a company that's sitting on nearly $100 billion USD in cash need to borrow money? Borrowing often has tax advantages which is the case here. And since the cost of borrowing for them is so low because of their credit rating and current rates it's attractive to borrow now regardless.

They have about 6.5B in cash as of their most recent quarter. Leverage, measured as debt to total cap was about 7% for Microsoft, compared to a peer average of about 16%. So they're a good 9 percentage points lower than their peers in regards to leverage. That means they can take on additional debt at very favorable rates right now, and still have a solid balance sheet that continues to yield an investment grade rating.

You also have to look at the expected use of proceeds. While it's usually similar language for most companies, one of the things they pointed out is that they could use this to pay off existing debt. The company currently has 3 bonds outstanding with rates above 4%, and the total amount out on those bonds is about $3B. So instead of tapping into the company's cash to pay down that high priced rate, they can simply use debt financed at less than 3% to pay down that debt. You'd be shocked how much a company of that size's interest expense grows when they see their weighted average interest rate increase by even 1%.
 
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