Microsoft sells US$19.75b of bonds in its biggest ever sale

[NEW YORK] Microsoft Corp raised US$19.75 billion in the third-largest US corporate bond sale of the year to help finance its planned purchase of LinkedIn Corp.

Investors put in more than US$50 billion of orders for the deal in the software maker's biggest ever sale.

The strong demand helped Microsoft to borrow at lower rates than it paid for the US$13 billion of bonds it raised in October. It also saved about US$40 million in annual interest payments compared with what it was offering to pay initially, according to people familiar with the matter.

Investors have been clamouring for US corporate debt in recent months. Yields are turning negative on a growing number of bonds globally as central banks in Japan and Europe ramp up stimulus packages, spurring money managers to seek higher returns in the US.

"You have the entire world looking for a place to put money, and when you compare Microsoft to negative yields, the tech company looks awfully attractive," said Jon Cartwright, a senior corporate bond analyst at Ameriprise Financial Inc.

Issuers are taking note. Monday was the busiest for US corporate bond sales since May 17, and the fifth busiest of the year. As of the early afternoon in New York, more than US$23 billion were expected to be issued.

"What we've seen in the past few weeks is an indication of what we could continue to see in the coming weeks or even months," said Dorian Garay, portfolio manager at NN Investment Partners, which manages more than US$215 billion of assets.

Microsoft in June announced plans to buy LinkedIn for US$26.2 billion, which it said it would fund primarily through issuing new debt. The software maker said it expects to close that purchase by the end of this year.

Proceeds from this bond sale may also be used for general corporate purposes including working capital, debt repayments, and share buybacks, the company said in a filing.

S&P Global Ratings assigned the bonds the top AAA grade in a note reviewing the sale on Monday. Moody's Investors Service also gave the bonds its top grade.

CreditSights, a research firm, recommended that investors buy the securities, and changed its rating on the company's bonds to the equivalent of a "buy" from the equivalent of a "hold."

The longest portion of the debt is a 40-year bond that yields 1.8 percentage points above Treasuries. That risk premium was down from initial discussions of about 2 percentage points, the people said, who asked not to be identified because the matter is private.

Each of the seven parts of the offering was sold with a coupon that was 0.2 percentage point below the originally discussed levels.

Bank of America Corp, JPMorgan Chase & Co and Wells Fargo & Co managed the bond sale.

Strong demand helped Microsoft borrow more cheaply than it did when it last sold debt, its US$13 billion deal in October. For example, the yield on its 30-year bonds was 3.7 per cent on Monday, it said in a statement, compared with 4.45 per cent in October.

Much of that decline was because overall bond yields are lower as Treasury prices have jumped. But yields relative to Treasuries, a measure of risk premium known as spreads, also shrunk for most parts of the deal. Monday's 30-year bonds were sold at 1.45 percentage points above Treasuries, compared with October's 1.5 percentage points.

Spreads have narrowed for US investment-grade corporate bonds broadly, reaching 1.46 percentage points last week, the lowest level in more than a year, from as much as 2.21 percentage points in mid-February, according to Bank of America Merrill Lynch index data. Risk premiums fall as investor demand for bonds increases.

Microsoft's bond sale is the third biggest of the year, behind Anheuser-Busch InBev NV's US$46 billion offering in January and Dell Inc's US$20 billion deal in May.

On Thursday, Apple Inc sold US$7 billion of bonds. Investors opened their wallets for the iPhone maker, allowing the company to lower yields on all portions of the offering, which was funding shareholder buybacks.

Like Apple, Microsoft's debt issuance is tied to avoiding an increase in its tax bill. Companies with cash holdings from overseas profits have to pay a 35 per cent tax to repatriate those funds to the US.

Rather than use that cash to fund its acquisition and pay the hefty taxes that result, it is far cheaper for large multinationals like Microsoft to borrow the funds.

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