Google strikes bonanza

Following the successful launch of Microsoft bonds late last year, Google has ensured itself a long term funding at benign market conditions. Too good to be true or are there other market forces at work ?

Let's first recapitulate the operations Microsoft (AAA) executed in autumn 2010. In September, it issued corporate bonds for a total amount of USD 6 bio spread over 4 maturities : 2013 (coupon 0,875%), 2015 (coupon 1,625%), 2020 (coupon 3%) and 2040 (coupon 4,5%). In view of the success, Microsoft early this year announce a new 30y bond with coupon 5,3%. As a result, of the total 12 bio USD of Microsoft bonds outstanding, 5,25 bio USD has a maturity of 2019 to 2041 with an average coupon of 4,36% : Congratulations Bill, the future of funding is safe.

Google this week performed the same trick. Well, not exactly, because Google (AA) has a huge cash/assets position of USD 35 bio of which its foreign subsidiaries held USD 16,9 bio in cash and marketable securities end of Q1 2011. So why turning to the bond market for a launch of USD 3 bio of cash raising. Well, they have a roll-over of 3 bio USD commercial paper program expiring in 2013 but apparently did not prefer to wait until then. They issued 3 lines of USD 1 bio each, respectively 2014 (1,25%), 2016 (2,125%) and 2021 (3,625%). Looking at these funding conditions, it is indeed close to free money.

So we have some very smart thinking of USA inc. Looking at the entire universum of corporate issuance, we have witnessed a further - albeit slow - improvement of funding conditions for non-governmental entities. The following graph says it all :

The evolution of this graph captures the credit crisis, its fall-out and policy response in 2 striking evolutions :

1) For the first time ever, funding conditions for financials have recently become worse than for non-financial corporates of less quality (AA spread > BBB spread) ; it simply means that the banking sector is not out of the woods yet and that the banking crisis is heavily interlinked to the sovereign debt crisis. For instance, a Greek debt restructuring should have knock-on effects on the balance sheet of German Landesbanks, Spanish banks and French banks. This risk is now increasingly being priced into senior bank debt.

2) 10y BBB industrial debt has a narrower credit spread than 5y BBB industrial debt and even 5y AA financial debt ! Apart from the reason mentioned above, it also implies that the current search for yield in a low interest rate environment (FED-ECB et alii) has pushed each and every one towards risk, nevermind the credit risk /time horizon framework. It also explains why Microsoft/Google can easily issue 10 and 30y debt, or Mexico for that matter 100y debt. From a corporate point of view, we fully understand. From an investor's and healthy risk point of view, we do not cheer this evolution.