Home > Business & Strategy > Google to sell first-ever corporate debt deal

Google to sell first-ever corporate debt deal

Internet giant vague on plans for proceeds; expansion seen as one possible option.

Google Inc., the world’s largest Internet search company, on Monday sold its maiden U.S. corporate debt deal, a $3 billion multitranche offering.

The issue includes three-, five- and 10-year tranches and was sold via joint bookrunners Citigroup, J.P. Morgan Chase and Goldman Sachs.

Size had been split evenly across tranches at $1 billion each.

The three-year piece was sold with a risk premium of 33 basis points over Treasurys to yield 1.258%; the five-year at 43 basis points, yielding 2.241%; and the 10-year was priced with a spread of 58 basis points over Treasurys, yielding 3.374%.

All three tranches were launched earlier Monday at narrower levels than preliminary pricing guidance had suggested, indicating good demand from investors.

Orders for the issue exceeded $10 billion, according to a person working on the deal. He said that orders had come from the “usual gamut” spanning mom-and-pop shops, major bond funds, insurance accounts and bank portfolios. He while the company stuck to its initially planned $3 billion size, the company could have easily doubled that amount and added any number of additional maturities, but chose not to.

“We plan to use the proceeds to repay outstanding commercial paper and for general corporate purposes,” according to a Google representative who declined further comment.

While the company would not firmly say what net proceeds will be used for, one likely route will include expansion, given the company’s massive reorganization and strategy under new Chief Executive Officer Larry Page. Page replaced former CEO Eric Schmidt in April.

In a conference call last month, Page said he was “very optimistic” about Google’s future but noted room for improvement. He also confirmed a shuffling of executives.

Although Google is sitting on a mountain of assets, including $35 billion in cash, the company–like many others–is clearly taking advantage of extremely low borrowing costs, which are at their lowest levels in years.

The average yield on investment-grade debt sold in the U.S. was last quoted at 3.8%, according to the Bank of America Merrill Lynch index.

While those levels might bode well for Google, investors can’t be as excited given the strain in yield.

Bill Larkin, portfolio manager at Cabot Money Management in Boston, said the Google offering is “bad news from a bond-buyer standpoint.” He said that while Google is essentially getting “free money,” investors won’t reap any real fiscal benefit given the payout.

To be sure, the new securities offer paltry compensation for investors in comparison to similar maturities in other asset classes–even those of safe-haven Treasurys. Larkin said bond buyers aren’t being compensated for any additional risk associated with corporate bonds, but are instead “window dressing” their portfolios with a new name.

Triple-A rated rival Microsoft Corp. sold a five-year issue that offered a 2.50% coupon in February.

Additionally, Google may be filling its war chest at bargain-basement rates.

“It’s very easy for a company like Google to prefund the purchase of another company at such attractive rates,” Larkin said.

No firm merger or acquisition plans have officially been announced by Google, though market speculation that the company will soon expand is rampant.

In addition, some of Google’s cash might be tied up offshore and would be subject to severe taxes if the company were to bring it back to the U.S.

“Certainly borrowing here gives them the flexibility they would not have if they repatriated cash from overseas,” said Margie Patel, senior portfolio manager at Wells Capital Management. She noted that those funds would be subject to high corporate tax rates, and locking up long-term, record-low borrowing costs in the U.S. was a good alternative.”It seems more prudent to take advantage of the strong market here for high-quality issuers.”

Google was most recently in the headlines when social network Facebook acknowledged it had hired a PR firm to plant anti-Google stories related to user privacy.

Monday’s deal has been rated Aa2 by Moody’s Investors Service and AA-minus by Standard & Poor’s. Settlement is slated for May 19.

Originally posted at: http://www.totaltele.com/view.aspx?ID=464794&G=5&C=5&Page=0

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Categories: Business & Strategy
  1. August 28, 2011 at 2:12 PM

    I liked your article is an interesting technology
    thanks to google I found you

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