Google’s parent company Alphabet locked in some of the lowest borrowing costs ever for a US company on Monday, in a $10bn bond sale that was the largest of a rush of opportunistic fundraising deals to start the new month.
The debt issuance marked a rare move for Alphabet, which is flush with cash and has not issued bonds since 2016. Until the new fundraising, it had just $4bn of debt outstanding.
The company sold bonds across six maturities ranging from five to 40 years, according to people familiar with the deal, mimicking a host of other highly rated companies that have secured longer-term debt at knockdown rates in recent weeks.
The double A-plus rated company’s $2.25bn 10-year bond sold with a coupon of just 1.1 per cent. That was well below the 1.5 per cent coupon Amazon obtained when it clinched record low interest costs on a 10-year US dollar bond earlier this year, according to financial data provider Refinitiv.
Alphabet’s new five-, seven- and 30-year bonds also set record low coupons. The five-year bond priced at 0.45 per cent — a quarter of a percentage point above the US government’s cost of funds and far lower than the 0.8 per cent paid by Amazon and Pfizer when they raised five-year debt in recent months.
The average yield across US investment-grade bonds sank below 2 per cent for the first time in July and was 1.91 per cent at the end of last week — a stark turnround from the depths of the coronavirus induced sell-off in March when yields rose close to 5 per cent.
Since then, the Federal Reserve has unleashed support for the market, including a pledge to buy investment-grade bonds directly. The central bank’s backstop has bolstered investor confidence, prompting a flood of money to enter the market and allowing companies to issue record amounts of debt.
Having initially focused on shoring up their balance sheets to endure the current economic downturn, companies are now beginning to opportunistically refinance debt, or even bring forward scheduled bond issuance due to the low cost of borrowing.
Industrial gas supplier Praxair and airline JetBlue were among the other companies issuing debt on Monday, contributing to a total of $17.4bn of issuance, according to Refinitiv.
“The market is still open, there is demand for investment-grade credit and financing costs are super cheap. So, why not?” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.
Alphabet earmarked $5.75bn of the debt for so-called environment, social and governance projects. Its investments in green energy have become a significant financial commitment in recent years, with purchases of renewables equivalent to the company’s entire energy needs in 2018 and 2019.
Alphabet listed a variety of possible uses for the money in a regulatory filing, including renewable energy projects, affordable housing, and financing businesses serving the black community. It also listed potential support for small businesses impacted by Covid-19.
Google first turned to the bond market in 2011 to take advantage of what were then historically low borrowing rates, raising $3bn in maturities of up to 10 years.
Like other tech companies, the search group established a borrowing programme to provide an extra source of liquidity, even though it had significant net cash on its balance sheet. US tax rules at the time made it impossible for American companies to tap cash held overseas without facing an extra tax charge, and by the end of 2017, more than 60 per cent of the company’s liquid reserves were held offshore.
However, US tax reform extinguished the different treatment of foreign reserves, freeing up all the company’s cash and reducing the need to borrow. By the end of April, it had long-term debt of $4bn, compared to total cash and marketable securities of $121bn.
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