What's Behind Microsoft's Bond Offering?

Microsoft (MSFT) sold $3.8 billion of bonds Monday in a deal that gave investors very little extra yield over Treasury bonds. The sale represented the AAA-rated software giant’s first ever long-term debt offering. “I was shocked at the low coupon,” says William Larkin, fixed-income money manager with Cabot Money Management, who didn’t buy any of the bonds.

The bonds were issued with maturities of 5, 10 and 30 years. The five-year bonds’ coupon of 2.95% was just 0.95% over comparable Treasurys. “It was the first double-digit spread I’ve seen in a year and a half,” says Bob Persons, manager of the MFS Bond fund (MBDIX), since before the credit crunch widened the risk premiums on all manner of debt. The 10-year bonds’ coupon of 4.2% and the 30-year bonds’ coupon of 5.2% were both 1.05% over comparable Treasurys.

The deal comes during what some market participants have called a thaw in the credit markets. Companies like Xerox (XRX) and Anheuser-Busch have come to market recently to take advantage of lowering risk premiums, which means lower borrowing costs for them. Of course, it’s too early to say whether this bond market thaw and the tandem rally in equities mark the beginning of a sustainable recovery or is just a temporary boost.

Redmond, Wash.-based Microsoft is sitting on $25 billion in cash, so the company doesn’t need the bond proceeds “unless they have something big in mind,” says Reena Aggarwal, professor of finance at Georgetown University’s McDonough School of Business. Microsoft referred questions on the use of the bond proceeds to the company’s preliminary prospectus, which stated the issue would fund “general corporate purposes” that may include funding for working capital, capital expenditures, repurchases of capital stock and acquisitions.

The deal also allows Microsoft to “dip a toe in the bond market,” says Andy Miedler, senior technology analyst for Edward Jones. The sale makes rating agencies more familiar with Microsoft, which would help if the company ever decides to issue large amount of debt quickly, Miedler notes.