Microsoft Looks to Raise at Least $25 Billion From US Bond Sale

Microsoft priced $25.0bn* of bonds on Oct. 29 in ten parts, from two-year floating-rate notes to 40-year notes paying 6.350%, according to a pricing term sheet the Redmond, Washington, company filed with the Securities and Exchange Commission on Oct. 30. It is Microsoft's first sale of bonds for cash since January 2017.

Why it matters: Microsoft is borrowing in size again as its spending on cloud and AI infrastructure climbs and its cash shrinks, though its bond debt will stay below its finance-lease liabilities.

The deal is bigger than either of Microsoft's last two cash sales: $19.75bn in August 2016 and $17.0bn in January 2017, according to the final prospectuses for those deals. Borrowing now costs more. The 2017 notes carried coupons of 1.850% to 4.500%. The eight new fixed-rate notes pay 4.850% to 6.350%.

Investors charged Microsoft little over the government's own borrowing cost. The fixed-rate notes priced at 25 basis points over Treasuries for the 2028 notes, widening with each step out in maturity to 105 basis points for the 2066 notes. Yields at issue run from 4.869% to 6.356%.

Most of the money is fixed and long. Fixed-rate notes make up $23.0bn* of the total, at an average coupon of 5.58%*, which works out to $1.28bn* of interest a year. The two biggest tranches, $4.0bn each, mature in 2036 and 2056. Notes due in 2046 or later account for $8.0bn*.

The two floating-rate notes, $1.0bn each, mature in November 2028 and November 2029. They pay 35 and 53 basis points over a floating base rate, with the rate reset every quarter, and Microsoft cannot redeem them early. Each of the eight fixed-rate notes can be redeemed early at a make-whole price, and seven of them also carry a par call in their final months.

Moody's rates the notes Aaa and S&P rates them AAA, both with stable outlooks, the term sheet says. The notes are senior and unsecured, and they settle on Nov. 4, four business days after pricing. They will not be listed on any exchange. The bank group grew from the three book-runners named in the Oct. 29 preliminary prospectus, J.P. Morgan, UBS and Wells Fargo, to 11. Barclays, BNP Paribas, BofA, Citigroup, Goldman Sachs, HSBC, Morgan Stanley and RBC joined, along with 12 co-managers.

Microsoft keeps $24.9bn* after the underwriting discount and before expenses. The preliminary prospectus says the money will go to general corporate purposes. It lists working capital, capital spending, share buybacks, acquisitions and repaying existing debt among them.

Microsoft's quarterly filing gives the company's own reason. "We issue debt to take advantage of favorable pricing and liquidity in the debt markets, reflecting our credit rating," it says. With top ratings from both agencies, Microsoft pays a narrow premium over Treasuries.

Its cash pile has shrunk. Microsoft held $64.5bn of cash, cash equivalents and short-term investments at Sept. 30, down $37.5bn* from a year earlier. Free cash flow stayed positive, at $18.6bn in the September quarter, while $16.6bn went out in financing, including $4.85bn of debt repaid and $11.1bn* of dividends and buybacks. Cash and short-term investments fell $12.3bn* in the quarter. Its finance-lease liabilities reached $71.0bn at Sept. 30 and now exceed that cash. Rackline's account of those leases is [here](https://www.rackline.news/story/1vt41lc).

Spending is climbing. Capital spending, including assets taken on under finance leases, came to $45.2bn in the September quarter, Amy Hood, the chief financial officer, said on the Oct. 28 earnings call. She guided to more than $50bn for the December quarter. Its quarterly filing says that spending supports its cloud offerings and its investments in AI training and other infrastructure, and that its leases, including finance leases, cover data centers, servers and network equipment.

Bonds still trail leases. Microsoft had $41.3bn of bonds outstanding at face value at Sept. 30, after repaying $4.85bn of debt in the quarter. The new notes lift that to $66.3bn* once they settle, still below the $71.0bn of finance-lease liabilities at Sept. 30.

This is a borrower using its rating, not one under strain. Microsoft locked in up to 40 years of funding at spreads no wider than 105 basis points, and the sale leaves its bond debt below its finance-lease liabilities. The cost is real: $1.28bn* a year of fixed interest, at coupons well above those it paid in 2017.

Signposts: settlement on Nov. 4; the final prospectus supplement, due by Nov. 2; $4.0bn of 3.300% notes due Feb. 6, 2027; December-quarter capital spending against the $50bn guide; and the debt and cash figures in the next 10-Q.

* Rackline estimate: totals, averages and changes calculated by Rackline from Microsoft's SEC filings, including the Oct. 30 pricing term sheet.