Will more large-cap tech firms look to reign in CP reliance?
One of the takeaways from The NeuGroup’s Tech20 meeting at the end of April was Barclays Capital’s continued warning about too much reliance on short-term debt. While a year ago the Lehman lessons of rolling too much short-term debt and becoming a target for shorts were still fresh, now the concerns were more about escalating costs of CP-backstop lines as banks reconsidered the economics.
These concerns combined with rating agencies taking a harsher look at firms issuing CP above backstop limits have made it an easier call to term out debt at historically low rates, with still-decent spreads, before the market turns and the opportunity goes away. While a rate rise is not yet in the cards, it is much more likely at the short-end than the long-end of the curve (and when it happens it will probably ratchet up quickly), which means even the most liquid firms should consider weaning themselves off of too much reliance on CP, even while it still looks like free money.
Oracle shows the traditional way
Oracle is scheduled to be in the market this week with 10-year notes that according to Bloomberg may yield about 90 basis points more than similar-maturity Treasuries and 30-year securities that may pay a 145 basis-point spread.
This will be the company’s first foray in the term debt markets in more than a year. Oracle sold $4.5bn of debt in June 2009 to help finance its acquisition of Sun Microsystems. Unlike its peer, Oracle will not seek to set a new benchmark in converts, such as Microsoft did with its $1.15bn zero-coupon offering last month.
Proceeds from the proposed $3.25bn Oracle offering will primarily be used to refinance existing debt, consisting of nearly $1 billion of commercial paper (CP) previously issued in conjunction with the maturity of $1 billion of floating-rate notes in May 2010 and pre-fund $2.25 billion of 5% senior unsecured notes due in January 2011. JPMorgan Chase & Co., Bank of America Merrill Lynch and BNP Paribas are managing the sale for the company.
The rating agencies are good with the deal, and it was expected to receive an A2 rating from Moody’s and A ratings from both S&P and Fitch.
Among The NeuGroup’s Tech20 companies, Oracle has been a pioneer of sorts in looking to bring traditional debt to Silicon Valley and this trend continues as its business becomes steadily more conducive to long-term debt coverage.
For example, as Fitch cited in its note: “Strong customer attach and renewal rates for software maintenance despite the severity of the economic downturn, resulting in a steadily increasing, high-margin recurring revenue stream that significantly reduces free cash flow volatility,” help support a positive rating outlook with this issue.
“The gross margin for the license updates and support segment steadily increased to 90.9% in FY 2010 from 87.9% in FY 2004, reflecting benefits of scale achieved through multiple acquisitions and solid cost management,” Fitch added.
Issues like Oracle’s this week are another sign that more traditional capital structures are coming to tech; and, with ample cash, many tech firms are in an enviable position to take maximum advantage of a unique post-crisis rate environment to make their transition.