Microsoft Boosts Bond Offering To $10.75B, Making It Largest Deal YTD

Microsoft has launched a $10.75 billion offering of SEC-registered senior notes, after boosting the proposed offering from $7 billion, as the triple-A-rated borrower locks in funds for a host of potential corporate purposes following the Fed’s largely hawkish commentary last week. As reported, the issuer is again eyeing among the lowest spread premiums on record for a corporate issuer. 

The offering is the largest since Medtronic placed $17 billion of notes on Dec. 1 last year, and would rank as the sixth largest corporate deal of the last three years, behind the $49 billion placed by Verizon Communications in September 2013, the Medtronic deal, and deals for Apple in April 2013 ($17 billion) and April 2014 ($12 billion), and the AbbVie spin-off-driven deal ($14.7 billion) in November 2012.  

Spreads for today's deal were set at the firm end of guidance ranges, which were established two basis points on either side of midpoint levels. The deal – which includes Feb. 12 final maturity dates across all six tranches – was set at T+35 for $1.5 billion of five-year notes (a proposed same-dated, floating-rate issue was dropped from the initially proposed structure at launch), T+60 for seven-year notes, T+75 for $2.25 billion of 10-year notes, T+103 for $1.5 billion of 20-year bonds, T+123 for $1.75 billion of 30-year bonds, and T+153 for $2.25 billion of 40-year bonds, sources said.

Talk was established well through initial whispers, which were reported this morning in the areas of T+55 for five-year notes, T+80 for seven-year notes, T+95 for 10-year notes, and T+140-145 for 30-year bonds. Whispers for the 20- and 40-year bonds were announced 20 bps through and 30 bps above the 30-year spread, respectively. 

Today’s offering refreshes and expands the issuer’s yield curve after Microsoft in 2013 inked among the five tightest initial reoffer spreads on record for corporate five-, 10-, and 30-year issues. In December 2013, the company placed $3.25 billion of notes across 1.625% five-year notes at T+35, 3.625% 10-year notes at T+90, and 4.875% 30-year bonds at T+105.

For reference, the 3.625% December 2023 notes traded this morning at a G-spread-equivalent level as wide as T+68, or 14 bps wider on the day, while the 4.875% December 2043 issue traded today at a G-spread-equivalent level near T+130, or 15 bps wider on the day and nine basis points wider month to month, trade date show.

On April 25, 2013, Microsoft completed a $1.95 billion offering at sharply lower rates and firmer spreads, across 1% notes due 2018 at T+32, 2.375% notes due 2023 at T+70, and 3.75% bonds due 2043 at T+90.

Last week, Apple (AA+/Aa1) placed a $6.5 billion offering, in an upsizing from an initially proposed $5 billion amount, as Microsoft’s rival also continues to buy back its shares at an aggressive pace. Apple inked the issues at L+25 for $500 million of five-year FRNs, T+42 for $1.25 billion of same-dated 1.55% fixed-rate notes, T+67 for $1.25 billion of 2.15% seven-year notes, T+85 for $1.5 billion of 2.5% 10-year notes, and T+125 for $2 billion of 3.45% 30-year bonds.

As appears to be the case this month, Apple's 2013 offering came at wider spreads than those recorded in Microsoft’s similarly timed offering.

Proceeds of today’s deal for Microsoft are earmarked for general corporate purposes, including working capital, capital expenditures, stock buybacks, acquisitions and repayment of existing debt.

Microsoft, through end of 2014, had completed roughly $8.9 billion of repurchases under a $40 billion, open-ended authorization dating to September 2013, according to S&P Capital IQ. The scale of share repurchases was up sharply from $6.4 billion in 2013 and $5.3 billion in 2012, and the 2013 fiscal developments also included a 22% increase in the company’s dividend payout.

But, at its peak pace, Microsoft bought back nearly $28 billion of its shares over the 12 months through June 2007, filings show.

Further, after accounting for nearly $23 billion of spending on capital spending, share buybacks, and common dividends over the 12 months through last September, Microsoft had generated a much higher $32.4 billion of cash from operations, according to S&P Capital IQ.

Of note, the company faces benchmark-size debt maturities over each year through 2023, most imminently the $1.75 billion of 1.625% notes due Sept. 25, 2015.  

Active bookrunners for today’s AAA/Aaa/AA+ offering (stable on all sides) are Barclays and Citi, along with passive bookrunners BAML, Goldman Sachs, HSBC. J.P. Morgan, RBS, and Wells Fargo.

Moody's today noted that Microsoft had recently announced that it expected to completed the remaining $31 billion share authorization by the end of December 2016.

However, the buyback plans have not yet dented the stable outlooks on the top-tier ratings.

“Similar to many global technology companies, absent US tax reform or the implementation of sustainable legal organization and/or tax strategies that shift the geographic recognition of revenue, profit, and cash flow, Moody's believes that Microsoft's dividends and share repurchase activity could be constrained over time unless incremental debt is raised. Doing so could result in ratings pressure,” Moody’s stated today, noting “very strong” liquidity as of the end of last year, including cash and liquid investments totaling $90 billion.

More from John Atkins/S&P Capital IQ LCD.

Subscribe to Insights