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Microsoft to issue biggest bond of the year

Microsoft was finalising plans to borrow at least $14bn Monday, in what will be the largest corporate bond sale of the year so far, as the US technology company joins a rush to tap debt markets ahead of expected interest rate rises later this year.

The deal will rank as one of the largest ever corporate debt sales not to finance a takeover, and follows a bumper start to the year for bond offerings. Companies, governments and their agencies have borrowed more than $600bn in 2017, the strongest start to a year since 2013.

Microsoft, which will issue debt across seven maturities ranging from three to 40 years, earmarked the borrowings for general corporate purposes, including share buybacks and capital expenses. Several investors said that the deal could eclipse $14bn by the time it is completed on Monday.

“We’re near a record pace of supply”, said Andrew Forsyth, a portfolio manager with BNP Investment Partners.

However investors are also braced for corporate borrowing to drop off later this year, as they await policy changes in Washington that could allow companies to repatriate billions of dollars held overseas in anticipation of lower US tax rates. Analysts at Bank of America predict repatriation could contribute to a 17 per cent drop in US investment grade debt supply this year from 2016.

Microsoft generates “only a portion” of its cash in the US, according to analysts at S&P Global, and is expected to “continue to access the debt market to help fund its annual dividend payments and share repurchases.” Roughly 95 per cent of Microsoft’s $123bn of cash was held overseas at the end of 2016, according to its latest filing with US securities regulators.

Banks underwriting the deal, led by Barclays and HSBC, were marketing the new 10-year paper with a yield 90 basis points above the benchmark Treasury, for a yield of roughly 3.37 per cent. The company’s existing debt that matures in August 2026 traded hands on Monday with a yield of 3.22 per cent.

The deal comes just six months after Microsoft borrowed almost $20bn to fund its purchase of social network LinkedIn, which was the fifth-largest corporate bond on record at the time. The ten-year notes on that bond priced with a yield of 2.42 per cent.

Microsoft’s new issue, rated triple-A by Moody’s and S&P Global, is the latest in a string of mega bond deals as bankers have explored the limits of investor appetite. Of the ten largest borrowings for general corporate purposes, nine have been sold in the past two years, according to Dealogic data.

The prospect of rising interest rates in 2017 has raised question marks over whether the rapid rate of issuance can continue and if debt sales in the first half of the year will be front loaded.

The 10-year Treasury yield is trading just under 2.5 per cent, a full percentage point higher than its levels last summer, leading to a significant rise for corporate borrowing costs in the bond markets.

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