Microsoft plans to issue debt to pay dividends and buy back stock as domestic cash runs thin. But there’s a hitch.
You’ve heard it here, there and everywhere: corporations are loaded with cash. Unfortunately for many companies, a lot of that cash is actually stuck overseas, avoiding US tax shrinkage. So when domestic cash demands increase and the coffers are thin, issuing debt is the go-to strategy. But, to paraphrase Clint Eastwood, companies need to know their limitations.
This appears to be a consideration for Microsoft, which according to Bloomberg plans to issue debt to pay its dividend and buy back stock. Although the company reportedly has approximately $22bn to $24bn in free cash flow as of its last fiscal year, about half of it is held overseas. The company is said to be planning to raise about $6bn before the end of its next fiscal year (June 2011) or possibly by the end of 2010.
But Microsoft has to be mindful of how much it wants to issue. Too much and it may become a rating and/or tax issue.
Bumping into ratings
According to Bloomberg, the $6bn number is the approximate amount that Microsoft can issue before it would start affecting its credit rating. Currently the company’s debt is rated Aaa by Moody’s and AAA by Standard & Poor’s.
Most treasurers, of course, know their company’s cash position, i.e., what cash is at home and what is overseas, but they may need to ask themselves how far they can push domestic leverage before the company gets tripped up by rating agencies and tax accounting.
This is a particularly salient question for treasurers of cash-rich tech companies, which often tend to hold the bulk of their cash overseas and who have been very acquisitive lately. Companies like Oracle, Cisco and eBay, for instance, reportedly keep more than 80 percent of their cash and equivalents overseas.
For its part, Microsoft is also raising cash to help shore up a sagging stock price, which is down 18 percent on the year. But for whatever the reason – be it for dividend distribution or to increase tax-deductible interest expense or lower WACC – the timing couldn’t be better for companies as a whole: rates are at historic lows. Last week alone, according to Thomson Reuters, 35 companies issued nearly $34bn in investment-grade debt, the highest weekly amount since May 2008. Just watch out for that rating.