On December 3, Microsoft Corporation (NASDAQ:MSFT) made a dual-currency debt offering comprising of $3.25B in US dollar bonds and 3.5B in euro bonds. At an aggregate value of $8B, this was the largest such issue made after November 2001, when AT&T Inc. (NYSE:T) issued bonds worth $10.1B.
According to a filing, the company plans to use the proceeds for “general corporate purposes.”
That is a pretty wide-ranging term, but Bernstein Research analysts Mark L. Moerdler and Emily Chan, in their analysis dated December 10, narrow down Microsoft Corporation (NASDAQ:MSFT)’s likely motives for the debt issue to four:
– The acquisition of a large US public company
– Debt management
– Expanding data center footprint within the US and outside
– Boosting dividend or buyback
The analysts find the last mentioned reason the most plausible. “We believe that Microsoft could potentially be raising cash in order to support an increase in buybacks, dividends or a one-time dividend. Given the size of the raise and the timing in relationship to the announcement of a new CEO, we believe that it is possible that Microsoft will announce an acceleration in buybacks at the time of the CEO announcement or shortly thereafter,” say the analysts.
Moreover, Microsoft Corporation (NASDAQ:MSFT) will complete its Nokia acquisition in the first quarter of the 2014, and the analysts surmise that part of the euro denominated debt would be used to pay that down.
Effect of the issue on debt obligations
Prior to 2013, Microsoft Corporation (NASDAQ:MSFT) had a declining or flat long-term debt profile. That undergoes a sea change after this issue, as per the graph below
Taken with $12.6B of outstanding LT debt as at Q1 FY 2014, the new bonds would increase Microsoft Corporation (NASDAQ:MSFT)’s long-term LT obligations by 63%.
Effect of the issue on interest coverage
Microsoft Corporation (NASDAQ:MSFT)’s interest bill on existing debt is $471M. The interest on the latest bond issue is $224M, making a total interest liability of $695M per annum.
This amount is more than covered by just MSFT’s dividends and interest income, which was $677M for the year ended June 30, 2013.
Microsoft’s investment rationale
Bernstein rates Microsoft Corporation (NASDAQ:MSFT) at Outperform with a price target of $44. “We believe that the move of Microsoft’s enterprise business to the cloud will generate significant revenue and EPS upside and will more than replace, over time, weakness or problems with Windows,” say the analysts.