Microsoft in landmark bond issues

By Richard Waters in San Francisco and Nicole Bullock in,New York

Published: May 12 2009 03:00 | Last updated: May 12 2009 03:00

Microsoft passed a significant milestone in its financial history yesterday as it turned to the bond market for the first time, raising $3.75bn to add to its already sizeable cash pile.

The landmark long-term debt issue signals a further break with the company's traditionally highly conservative stance towards its balance sheet, and the culmination of a six-year process since it first began to adapt its financial strategy to the increasing maturity of its business.

The company raised a total of $3.75bn paying yields ranging from 2.97 per cent to 5.21 per cent. The deal was several times subscribed. Low benchmark rates for US Treasuries combined with a rally in corporate debt have resulted in low borrowing costs and wave of new issuance.

The money would be used for general corporate purposes and to fund its share buy-back plans, Microsoft said. While the company generates the cashflow to support its existing stock repurchases, it has signalled for some time that it has been looking at using borrowing to reduce its overall cost of capital and increase its financial efficiency.

"Microsoft along with a number of other corporate issuers are looking at overall cost financing and seeing attractive rates," said Tom Lewis, head of investment grade syndicate at Morgan Stanley, one of the underwriters on the deal. "Companies learned last year that when there is a window for issuance, you take it."

Like many other technology companies, Microsoft has long clung to a conservative capital structure, preferring to keep a large amount of cash on hand and avoid significant borrowings. Tech companies often seek to maintain cash reserves both to invest in new growth markets and as an insurance against sudden technological change that might weaken their core businesses.

The software giant broke with its past when it first began to pay a dividend six years ago. A year later it paid a $32bn special dividend to reduce its cash pile. Despite the latest easing of its ultra-cautious financial approach, Microsoft's debt remains small compared to its strong cashflow and Moody's yesterday reaffirmed its triple A credit rating for the company.

Last year, Microsoft briefly ceded its position as guardian of Silicon Valley's biggest cash mountain to Apple, whose reserves have soared as it has hoarded the proceeds from a series of hit consumer products. At the end of March, both companies held around $25bn in cash and short-term investments.

Microsoft initially signalled its intention to tap the public debt markets as part of its aborted takeover bid for Yahoo last year. In its first public borrowing, the company raised $2bn in the commercial paper markets just before the financial crisis worsened last autumn.