Microsoft’s zero-coupon convertible bond success may tempt other treasurers.
A previously close-to-dried-up well of financing may once again be sloshing with cash again. That’s because Microsoft saw great success with a recent $1.15 billion zero-coupon convertible bond offering. This should be welcome news to those companies looking for cheap ways to finance a project, pay off debt or buy back shares (the latter two of which Microsoft actually did). At the same time, treasurers should also be prepared for a non-stop barrage from banks offering to underwrite like deals.
To be sure, the healthiest balance sheets in the US right now belong to corporations – last week the Fed reported that nonfinancial companies held $1.84 trillion in cash and other liquid assets as of the end of March, which was up 26 percent from a year ago. This is obviously true of Microsoft, which reportedly has $39 billion of cash and generates about $16-$17 billion of free cash flows a year.
Still, as the saying goes, you can never be too skinny, too rich or apparently, have too many sources of cheap capital. Microsoft as mentioned repurchased its own shares in the deal but some observers also note that the company might be forecasting a rise in short-term rates in the next year or so.
By all indications, Microsoft’s issuance was a huge success. The three-year notes were three times oversubscribed with bidding reported to be from high-quality investors. According to UBS, this was the largest convertible offering globally in 2010 and the first zero-coupon/zero yield convertible since 2005. It is also the first convertible issued by a Aaa/AAA-rated company since 2002, according to UBS. The notes have a final premium of 33 percent, which means they can be handed over for shares when Microsoft stock rises that much – about $33.40 from the June 8 closing price.
So for treasurers of AAA companies looking to raise cash and do it on the cheap, this might be time to tap the convertible market. Microsoft’s success showed that there is big demand for solid companies’ out passing the hat.