Borrowing costs

Alphabet locks borrowing costs at record high in $ 10 billion deal

Google’s parent company Alphabet blocked some of the lowest borrowing costs on record for a U.S. firm on Monday in a $ 10 billion bond sale that was the largest in a series of opportunistic fundraising operations to start the new month.

The debt issuance marked a rare move for Alphabet, which is teeming with cash and has not issued any bonds since 2016. Until the new fundraising, it only had $ 4 billion in debt. Classes.

The company sold bonds on six maturities ranging from five to 40 years, according to people familiar with the deal, emulating a host of other highly rated companies that have guaranteed longer-term debt at cut rates. over the past few weeks.

The double-A-plus rated company’s $ 2.25 billion 10-year bond sold for a coupon of just 1.1%. It was well below the 1.5% coupon Amazon got when it landed record interest charges on a 10-year U.S. dollar bond earlier this year, according to financial data provider Refinitiv. .

Alphabet’s new five-, seven- and 30-year bonds also saw record coupons. The price of the five-year bond was 0.45%, a quarter of a percentage point above the cost of US government funds and well below the 0.8% paid by Amazon and Pfizer when they raised a five-year debt in recent months.

The average yield on US investment grade bonds fell below 2% for the first time in July and was 1.91% at the end of last week – a sharp turnaround from the depths of the coronavirus-induced selloff in March when yields rose nearly 5 percent.

Since then, the Federal Reserve has unleashed its support for the market, notably by committing to buy quality bonds directly. The central bank’s safety net has boosted investor confidence, sparking money into the market and allowing companies to issue record amounts of debt.

Having initially focused on consolidating their balance sheets to cope with the current economic slowdown, companies are now starting to opportunistically refinance their debt, or even anticipate scheduled bond issues due to the low cost of borrowing. .

Industrial gas supplier Praxair and airline JetBlue were among the other debt issuers on Monday, contributing a total of $ 17.4 billion in emissions, according to Refinitiv.

“The market is always open, there is a demand for good credit and the financing costs are very cheap. So why not? ”Said Monica Erickson, head of the investment grade business team at DoubleLine Capital in Los Angeles.

Alphabet has allocated $ 5.75 billion in debt for so-called environmental, social and governance projects. Its investments in green energy have become a significant financial commitment in recent years, with renewable energy purchases equivalent to all of the company’s energy needs in 2018 and 2019.

Alphabet has listed a variety of possible uses for money in a regulatory filing, including renewable energy projects, affordable housing, and finance businesses serving the black community. He also listed the potential support for small businesses affected by Covid-19.

Google first turned to the bond market in 2011 to take advantage of historically low lending rates, raising $ 3 billion with maturities of up to 10 years.

Like other tech companies, the research group set up a borrowing program to provide an additional source of liquidity, even though it had significant net cash on its balance sheet. U.S. tax rules at the time prevented U.S. companies from exploiting cash held abroad without having to pay additional taxes, and by the end of 2017, more than 60% of the company’s cash reserves were held in abroad.

However, the US tax reform ended the differential treatment of foreign exchange reserves, freeing up all of the company’s cash flow and reducing the need to borrow. At the end of April, its long-term debt stood at $ 4 billion, against a total of cash and marketable securities of $ 121 billion.