Google Inc. made its first foray into the bond market with a $3 billion sale to pay back short-term borrowings at relative yields comparable to companies with the highest credit grade.
The bond sale was “a home run for Google,” said Lon Erickson, a money manager at Thornburg Investment Management Inc. in Santa Fe, New Mexico, who oversees $9 billion. “The big pile of cash on the balance sheet and continued cash generation makes people plenty comfortable to own that debt.”
Google, with total cash and marketable securities of $35 billion at year-end, according a regulatory filing, is tapping the corporate bond market as investment-grade borrowing costs tumble to about the lowest since November. Chief Executive Officer Larry Page, who replaced Eric Schmidt last month, is ramping up spending to expand in mobile and video advertising even as U.S. and European authorities mount investigations into the company’s business practices.
The world’s biggest Internet-search company split the sale evenly between three-, five- and 10-year notes, according to data compiled by Bloomberg. The 1.25 percent, three-year notes yield 33 basis points more than similar-maturity Treasuries, the 2.125 percent, five-year debt pays a 43 basis-point spread, and the 3.625 percent, 10-year securities offer 58 basis points above benchmarks, Bloomberg data show.
Mountain View, California-based Google, graded Aa2 by Moody’s Investors Service and AA- by Standard & Poor’s, paid bond investors less than other AA rated companies have to offer to sell similar securities. The average spread on AA rated bonds was 105 basis points as of May 13, according to Bank of America Merrill Lynch index data.
The debt market priced Google’s debt at the level of AAA rated companies, which pay an average spread of 59 basis points, the index shows.
Microsoft, the world’s largest software maker and one of four non-financial U.S. companies with the top credit grade from S&P and Moody’s, issued $2.25 billion of bonds in February, Bloomberg data show.
That sale included $750 million of 2.5 percent, five-year notes that priced to yield 38 basis points more than similar- maturity Treasuries, and $500 million of 4 percent, 10-year debt that paid 48 basis points more than benchmarks.
The offering will give the Internet search provider more flexibility to spend cash in the U.S., Aaron Zamost, a Google spokesman, said in an e-mailed statement. As of March 31, Google’s foreign subsidiaries held $16.9 billion, or 46 percent, of the company’s cash and marketable securities, according to unaudited figures.
Reserves for Investigation
“We plan to use the proceeds to repay outstanding commercial paper and for general corporate purposes,” Zamost said.
Google set aside $500 million related to the possible resolution of a U.S. Justice Department investigation of its advertising business, resulting in lower first-quarter profit.
The expense trimmed net income to $1.8 billion, or $5.51 a share, in the first quarter, Google said May 10 in a regulatory filing.
Until now, Google has relied on a short-term debt financing program that allowed it to borrow as much as $3 billion by issuing commercial paper, according to the quarterly filing. The debt has a weighted average interest rate of about 0.3 percent and weighted average maturity of about 163 days, it said today in a filing.
Commercial paper typically matures within 270 days and is used to finance everyday activities such as payroll and rent.
The average yield on investment-grade debt sold in the U.S. fell to 3.78 percent on May 9, the lowest since Nov. 23, before rising to 3.8 percent at the end of last week, according to Bank of America Merrill Lynch index data.
Google Chief Financial Officer Patrick Pichette said in a December conference call that low interest rates hadn’t lured the company into exploring financing through long-term debt.
“My job is to make sure that we have the perfect capital structure that fits our strategic needs,” Pichette said. “If at the right time we decided that actually more long-term debt would make sense, right, we’d announce it.”
Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. managed today’s bond sale, according to the regulatory filing.
Texas Instruments Inc., the biggest analog-chip maker, and Berkshire Hathaway Inc.’s Burlington Northern Santa Fe LLC are also among a dozen companies marketing or selling at least $7.59 billion of corporate bonds in the U.S. today, Bloomberg data show. Sales reached $36.3 billion last week, the most since the period ended April 1, when $36.4 billion was issued.
Google “came with a bunch of other deals and still attracted as much demand as it did,” Erickson said. “People are still looking to buy fixed-income products and will pay up for quality.”