June 9 (Bloomberg) -- Microsoft Corp., the world's biggest software maker, is raising $1.15 billion of interest-free financing from its first sale of convertible bonds.
The senior notes, which don't pay a coupon and will be redeemed at face value, can be handed over for shares when Microsoft stock rises to about $33.40, a 33 percent increase from June 8, according to a statement. The bonds, which Redmond, Washington-based Microsoft may redeem in cash, stock or both, can't be converted until March 2013 except in "certain circumstances," and they mature in June that year.
Microsoft is the only issuer of convertible bonds to boast a top AAA rating from Moody's Investors Service and Standard & Poor's, allowing it to benefit from investors seeking to boost the average ratings of their funds. Convertible bonds are typically sold by companies that are unrated or graded below BBB-, the lowest investment grade.
"Really, with the zero coupon this didn't look that attractive to us," said Anja Eijking, who manages the equivalent of about $2 billion in global equity-linked securities at F&C Netherlands BV in Amsterdam and didn't order the bonds. "You'd need a strong view on the stock appreciating. Basically, this is cheap financing for the issuer."
Microsoft shares gained 23 cents to $25.34 at 1:45 p.m. New York time in Nasdaq Stock Market trading. They had dropped 18 percent this year before today.
Stock Signal?
The convertible-debt may indicate the company isn't counting on a lift in its equity prices, said Sasa Zorovic, an analyst with Janney Montgomery Scott LLC in Boston.
"It makes me wonder if they think their share price won't rise," Zorovic said. He has a "neutral" rating on Microsoft's shares, which he doesn't own. "Windows 7 is doing well, but they can't seem to get out of the 1990s. They are just so far behind smartphones, iPads -- you name it."
Microsoft had $2.25 billion of short-term debt outstanding as of March 31, according to a filing with the U.S. Securities and Exchange Commission, and will use the proceeds to repay some of the borrowing, it said in the statement. The new notes substitutes for volatile short-term interest rates. Convertible bonds allow investors to swap debt into common stock at a preset rate under specified conditions.
Microsoft gave underwriters an option to buy an additional $100 million of the notes, according to the statement. The underwriters weren't named in the statement.
The software maker issued $3.75 billion of five-, 10- and 30-year debt in May 2009 as it tapped the corporate bond market for the first time, according to data compiled by Bloomberg.
"The main driver for Microsoft at the moment is corporate spending, and the potential pickup in corporate spending is really the key," said Stephen Taylor, an analyst at Dolmen Securities Ltd. in Dublin. He expects Microsoft shares to reach $35 within the next year. The convertible bond sale is a "small positive," he said.
Convertible Notes are debt instruments that may be converted to an equity holding at a future date. A convertible note is therefore issued with a right to convert the holding into an agreed number of ordinary shares at inception, or at a time closer to conversion. In effect, a convertible note is a fixed interest security with a call option to purchase shares at some later date.
