By Nick Lord
Microsoft's record breaking bond deal last week reveals much about the market. In particular it shows how clever corporate finance only available to the biggest companies can be used to gussy up shareholder value.
The $4.75 billion deal had tranches of three, five, ten and thirty years and broke many records. At the three year mark, it broke the record for the lowest ever coupon from a corporate issuer with a mark of 0.85 percent. At the 30-year end it matched the record lowest coupon of 4.5 percent.
The price of the issues came in at 25 basis points over the relevant US Treasury bill for the three-year, 40 basis points over for the five-year, 60 bps over for the 10-year and 82.5 basis points over for the 30-year. All told there was $15 billion of demand for the deal.
The demand for the issue and the razor thin pricing showed how much demand there is for investment grade credit at the moment. The FOMC indicated last week that rates are staying low for some time and investors are clamoring for yield and safety.
There is nervousness about the credit of low grade companies and their sovereign cousins. As a result a AAA-rated issuer with scarcity value such as Microsoft could take massive advantage.
Perhaps most interesting is what the software giant plans to do with the money: give it straight back to shareholders. On Tuesday it announced that it was increasing its dividend by 23 percent to 16 cents a share, taking its dividend yield up from 2.1 percent to 2.6 percent. Moreover, the company has said that it will buy back up to $10 billion of its own shares in its fiscal year ending in 2011.
The bond deal is also tax advantageous for the company. It has a nearly $40 billion cash pile, but much of that is offshore. Bringing it back to the US would result in a large tax bill. Therefore borrowing the money and using it to undertake the dividend hike and buybacks makes financial sense.
Other large companies could take advantage of this situation where excessively cheap funds are available in the bond markets and use them to boost shareholder value through dividends and buybacks. This would not be available for lower rated companies with less cash on the books.
What is also interesting is this exercise looks rather like a leveraged recap deal that is a common way for private equity invested companies to return cash to shareholders. The conditions needed for such exercises are rare. But Microsoft has tapped this window perfectly.