Microsoft, Meet the Bond Market

Kate Haywood has some early speculation today on the subject of Microsoft's bond spreads. Microsoft has never had any bonds - it doesn't even have a credit rating - but its CFO has said, in the wake of the Yahoo bid, that "it's likely we're actually going to borrow for the first time".

Without a rating or any kind of benchmark out there, it's very tough to work out just how attractive Microsoft really will be as a credit. Here's Haywood:

One portfolio manager said he expects a 10-year Microsoft bond to sell with a risk premium, or spread, of less than 1.6 percentage point over U.S. Treasurys. A recently issued 10-year from triple-B-rated transportation company Union Pacific sold at a spread of 2.1 percentage points.

Union Pacific? I know it's hard to find comparables in this market, but that's straight out of left field. To me, 160bp over Treasuries seems quite wide. Microsoft had gross profit of more than $40 billion last year, and net income of $17 billion. The interest on $10 billion of notes paying a 5% coupon would be $500 million a year: pocket change, really. Microsoft bonds are a very safe bet in a time when there's a large appetite for safety, and I wouldn't be at all surprised if they came in much tighter than 160bp over.

That said, however, Treasuries are trading at extremely low nominal rates right now: the 5-year is at 2.64%, and the 10-year is at 3.54%. If Microsoft came at 136bp over the 5-year, that would mean a yield of just 4%, which is not exactly compelling from a buy-side perspective. In any case, Microsoft's borrowed billions are unlikely to cost it much more than 5%, which is a pretty attractive rate to pay for a company as high-profile as Yahoo.