There is something far more important than the Microsoft Corporation (NASDAQ: MSFT) bond offering. It is even more important than why the company is raising the money.  This Microsoft bond offering could act as one of the final first round fixes for the corporate bond market.  In short, it could help every company wanting to issue corporate debt regardless of the underlying issuer’s rating.

At first we wondered if Microsoft might be taking on additional cash for an acquisition, even though its cash and liquidity is nearly $30 billion.  It looks like the real reason for the fund raise is to assist in the company’s $40 billion share buyback program.

With all of the funds being raised by banks, you might have wondered why they would have not taken on debt rather than diluted the common holders with equity.  But the reason is rather simple.  The equity dilution does not pile on the regulatory leverage on the books like a bond offering would, and the spreads there would still be rather high.

The spreads in the 5-, 10-, and 30-year offering are said to be around 100 basis points over Treasury prices.  With the 10-year at 3.18% and the 30-year at 4.19%, this becomes dirt cheap money for the company.

It was not that long ago that corporate bond spreads for average investment grade (A-rated) were north of 500 basis-points over equivalent Treasuries.  Other companies will not get this rate.  Microsoft has a “AAA” rating, meaning the best of all ratings.  It is unlikely that any other company will get spreads issued at levels this tight.

We had a benchmark for overall investment grade bond spreads at being almost 450 basis points.  That sounds high after the rally, but keep in mind that we were north of 500 basis points during the peak of the malaise.  Even then, the markets were shut down to most of the market.

Our last data seen on longer-dated corporate spreads is  still more than 200 basis points for the “AAA” category.  That being said, Microsoft’s bond-talk prices are 100 basis points or thereabouts.

99.9% of companies do not have the same characteristics as Microsoft.  So this 100 basis point spread won’t be available for even the other “AAA-rated” companies.  Either way, this should only tighten up the spreads in the corporate bond markets.

JON C. OGG

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