Microsoft is planning a mega bond sale to raise capital, finally joining its rivals in issuing debt for the AI buildout.
Early Thursday morning, the world's largest software company said that it is issuing debt, split into 10 parts, according to a filing to the Securities and Exchange Commission.
Microsoft will raise at least $25 billion, Bloomberg reported. The company declined to confirm the amount with Barron's.
Alphabet, Amazon.com, Meta Platforms, and Oracle -- four of the five data center powerhouses -- have all tapped the bond market this year, leaving only Microsoft sitting on the sidelines, until now. The holdout has finally caved to the relentless demand for artificial intelligence infrastructure.
Before Thursday's filing, Microsoft had last tapped the market to swap Activision Blizzard debt after its 2023 acquisition of the videogame publisher. In 2020 and 2021, the company exchanged portions of its existing debt to take advantage of historically low interest rates. Microsoft effectively hasn't issued long-term bonds to raise new money since 2017.
Some of the planned bonds won't mature for 40 years, according to Bloomberg data. Such a long maturity allows companies to lock in current interest rates and to avoid paying investors potentially more money later on if they sell bonds again. Google-parent Alphabet issued bonds maturing in 100 years in February.
While there have been market jitters about the pace of AI investment -- and the rising debt loads to fund it -- Microsoft, with a market value of nearly $4 trillion, has the right credentials and the timing looks ripe.
The company seems a safer bet among hyperscalers or large-scale data center operators, when strictly looking at free cash, or the money left over after making various expenditures. It's the only company out of the five main hyperscalers that has reported a positive free cash flow for the last quarter, at $18.6 billion on Wednesday.
Aggressive spending on AI has meant aggregate free cash flow of the five hyperscalers will go negative for the first time in history after Amazon reports earnings on Thursday, according to estimates on FactSet. Wall Street expects Amazon.com to report negative free cash flow of $9.91 billion in its latest quarter, ended in September, continuing the trend of the previous two quarters.
Meta's cash flow turned negative for the first time in history in the third quarter. Alphabet has posted negative free cash for two straight quarters, while Oracle's negative cash flow goes back six quarters.
Microsoft's move into the bond market is a sign that the company wants to take advantage of the moment. On average, financially sound companies are only paying an additional 0.86 percentage point in yield to investors over practically risk-free U.S. government debt. That's way below the average premium of 1.3 percentage points three years ago.
Microsoft also has an unusually strong credit rating. It is one of only two publicly traded U.S. firms with top-tier AAA rating -- another reason it should pay a below-average premium for corporate debt.
Corporations with the lowest-rated debt are the only ones in true peril. Their premiums have surged now to an average of 13.07 percentage points over Treasuries, highest since the pandemic.
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