Market participant said Microsoft’s new bond offering is cheap

Microsoft Corporation Jumbo Bond Orders Reach More Than $26B

Microsoft was overwhelmed by a great number of investors who wants to invest in its jumbo bond. According to Reuters, the investor orders for its jumbo bond reached more than $26 billion on Monday.

Investors described Microsoft’s jumbo bond deal as an extra ordinary new issue. They are expecting the software giant to increase the size of the deal because of the strong buy-side interest.

Microsoft is one of the three corporations left with a Triple A rating.

Microsoft’s bond deal is cheap

A portfolio manager said, “Initial price talk is way too cheap. I expect tightening of at least 15bp out at the longer end of the curve.”

Microsoft is offering a new issue concession for a 40-year tranche in a seven-part deal at 30 to 35 basis points.  The usual curve difference between a 30-year and a 40 year tranche is 20 basis points, according to syndicate managers.

Barclays and Citigroup are the managing underwriters for Microsoft. The underwriters initially targeted a $7 billion deal. Market participants expect the deal to increase since the bond is already covered nearly four times.

Despite the volatility in the equity market, investors are pouring cash into the asset class.

The long-dated bond is attractive from a corporate finance perspective because the issuers managed to lock-in a very cheap financing at sub 2% for 10-year Treasury yield and 2.48% for the 30-year Treasury yield.

One of the syndicate managers commented, “It definitely feels like they are getting set up to do more long-end paper, because by having 20, 30 and 40-year tranches they will be hitting every pocket of long-dated demand possible.”

Microsoft to use proceeds for general corporate purposes

Microsoft will use the proceeds from the sale of the notes for general corporate purposes, which may include funding for working capital, capital expenditures, repurchased of capital stock, acquisitions and repayment of existing debt, among others.

A market source told Reuters that the demand for Microsoft’s notes before 11:00 in the morning, Eastern Time is as follows:

  • 5-year FXD: $3.9 billion
  • 5-year FRN: $950 million
  • 7 year: $4 billion
  • 10-year: $5.5 billion
  • 20-year: $3.7 billion
  • 30-year: $4.5 billion
  • 40-year: $3.75 billion

Bank of America Merrill Lynch, Goldman Sachs, HSBC, JP Morgan, RBS and Wells Fargo are passive under writers for Microsoft on the deal.