NEW YORK, Jan 30 (IFR) - Microsoft’s coveted Triple A rating could come into question and AT&T is likely to lose its Single A rating after both brand names outlined plans that could see their leverage surge.
Microsoft, one of only three Triple A rated corporates in the world, told analysts on its earnings call on Monday that it wanted to complete its entire US$40bn share buyback programme by the end of 2016 - a move that analysts and bankers think could see it almost double its US$28.3bn of outstanding debt with issuance of about US$25bn over the next two years.
“Microsoft’s leverage will likely increase to the 1.3-1.5 times range in the next couple of years, from around 0.8 times, and that will make it hard to justify the Triple A rating,” said Jordan Chalfin, senior technology analyst at CreditSights.
Microsoft is currently rated Triple A by both Moody’s and S&P and AA+ by Fitch.
On Tuesday, just days before the government disclosed that AT&T was the largest bidder in its biggest-ever auction of wireless spectrum, the company served notice to analysts that it was now comfortable going from being the lowest leveraged investment-grade telco to possibly more highly geared than Triple B-plus rated Verizon.
“It is very conceivable that our net debt-to-Ebitda ratio would go somewhere in between the 2.0 and 2.5 range,” said CFO John Stephens on the earnings call. “We will let the debt rating agencies deal with it as they see fit. But we are comfortable with where we are going and we understand the implications.”
The moves by both companies reflect an increasing realisation among the top US corporates that having high ratings is not as relevant as it used to be, now that all-in yields have dropped to such lows.
“We expect more companies to leverage up because at this point in time you can issue a fair amount of debt without really having a meaningful impact on default risk or spreads,” said Stephen Antczak, head of US credit strategy at Citigroup.
“And it’s clear that companies are rewarded by their shareholders for buying back equity and pursuing acquisitions.”
The mild impact, at least on funding costs, of a one-notch downgrade on either Microsoft or AT&T, can be seen on an all-in yield basis now that the 10-year Treasury yield has plunged by more than 40bp in January alone, to around 1.68%.
On Friday, the 30-year Treasury yield hit 2.24%, the lowest it has ever been.
Even looking at credit spreads, which have widened in recent months to compensate for the plunge in Treasury yields, the difference between ratings is minimal.
“Microsoft in 10-years trades at 65bp over Treasuries, while [Aa1/AA+ rated] Apple trades at 75bp, so in reality saving 10bp isn’t all that much for such a large company,” said Scott Kimball, senior portfolio manager at Taplin Canida & Habacht, part of the BMO Global group of funds.
The same goes for the difference in dropping from Single A to Triple B.
AT&T, rated A3/A-/A, had a 3.9% 2024 bond recently trading at 143bp over Treasuries - just 8bp inside the 151bp level on Verizon’s 3.5% 2024s, which are rated lower at Baa1/BBB+/A-.
Kimball estimates each basis point saves a mere US$100,000 on a US$1bn borrowing.
AT&T’s Stephens expressed hopes last May, when the company announced a US$49bn acquisition of satellite broadcaster DirecTV, that the combined company would maintain a Single A rating.
But since then, AT&T has also bought Mexico’s Iusacell and Nextel, and it bid US$18.2bn in the airwaves auction, the results of which were announced Friday.
AT&T, like Verizon, has outlined a three-year deleveraging plan to ratings agencies, but it appears that after having to compete so aggressively at the spectrum auctions, it has re-adjusted its expectations about keeping a Single A rating in the short term.
As for Microsoft, its net leverage is actually negative, given that it has US$90bn of cash and US$28.3bn of debt outstanding.
But with US$31.1bn of share buybacks left to do, as well as about US$10bn each year in dividend payments, Microsoft’s gross leverage - which does not incorporate any cash, even the US$6bn held in the US - could soar above one time.
S&P puts more emphasis on Microsoft’s net leverage, but bankers and analysts believe Moody’s could question why it should keep its Aaa rating on the company now that it is rushing through its buyback programme.
“I would definitely think there would be pressure on the Moody’s rating because of their gross debt focus,” said a head of debt capital markets technology origination at one of the biggest bond houses.
According to CreditSights’ Chalfin, Microsoft will use about US$25bn-$26bn of domestic cash in each of the next two years to pay for the buybacks and dividends.
“It seems possible that Microsoft could issue around US$25bn of debt to fund half of its total shareholders returns over the next two years,” he said. (Reporting by Danielle Robinson; Editing by Matthew Davies)