The challenge
To achieve its capital structure objectives, Microsoft was looking at the opportunistic issuance of public debt. “We strongly believe in finance when you can rather than when you have to,” explains George Zinn, Corporate Vice President and Treasurer of Microsoft Corporation.
Microsoft had some key objectives it wished to achieve when issuing public debt including:
- To set new benchmarks in terms of pricing.
- Achieve diversification of its investor base.
- Diversify the maturity ladder of existing bonds and this new issuance.
- Be opportunistic and benefit from the arbitrage across currency markets by analysing the different currencies and markets to see where it can leverage from a natural hedge of the currency exposure which it takes on by issuing bonds in a non-USD market.
- Maintain an element of surprise, which as most corporates know is a tough one to achieve.
The solution
Microsoft achieved all its objectives by issuing a multi-currency and multi-tranche debt of $8 billion. The lead banks that helped it refine its strategy and ensured smooth execution in Europe and the United States simultaneously were Barclays, J.P. Morgan, HSBC and Wells Fargo.
This approach of launching a simultaneous dual-currency transaction in the European and US markets is not typical. Popular wisdom suggests that if European investors participate in USD issuance and you issue in Europe at the same time, those orders will fall out of the USD books. Many advised therefore that this approach would reduce its price leverage and also reduce the size of the order book.
“We respectfully disagreed,” states Zinn.
Microsoft put the strategy in place when it carried out its inaugural euro-denominated bond issuance in 2012. This first foray into the euro bond market was used to learn the intricacies of the market and build relationships with the investor base. A very small transaction also helped it establish a pricing benchmark for future issuance. Ultimately, the order book was over-subscribed, offering a great indication of investor appetite for Microsoft paper. “Our openness, signalling that we were doing both euro and USD issuances, was important to us and helped it further solidify our investor base,” explains Anita Prasad, General Manager, Treasury Capital Management.
Best practice and innovation
As Microsoft considered its options it noticed that Basel III and other regulatory reforms were likely to increase the cost of bank financing and therefore would not be a good bridge to a capital markets transaction. Furthermore, with rates expected to increase, it wanted to ensure it raised sufficient capital in the long-term public debt markets; and thus lock in interest savings.
Given its strong AAA credit ratings, the team wanted to make sure that they effectively monetised this advantage. “If you look at bond pricing for AAA and strong AA companies, there isn’t a meaningful difference in credit spread over UST. Our challenge, therefore, was to ensure that we diversified our investor base and sought out arbitrage opportunities in global markets to achieve the lowest cost possible,” explains Joel Combs, Director of Treasury Capital Management.
The transaction set several industry records:
- Largest single-day capital raise across euros and USD since 2001— the logistics of pulling off $8 billion in two markets in a single day are impressive on their own.
- Achieved combined investor demand of $20.5 billion (USD equivalent) across the EUR and USD transactions.
- At the high end of the price guidance despite the large €3.5 billion taken out of the market.
- Negative new issue concessions in ten-year and 30-year, which is remarkable given the tight spread levels.
- It received participation from several central banks who are not a typical corporate buyer.
“The success of this transaction is a testimony to the ability of this team to stay a step ahead, think strategically and be proactive in managing opportunistic issuance in debt capital markets,” said Amy Hood, EVP and CFO of Microsoft.
