(Bloomberg News) Google Inc., whose shares have dropped 9% this year, is making its first foray into the bond market with a planned $3 billion sale to pay back short- term borrowings.
"People aren't going to do very much credit analysis, they're going to look at the balance sheet, and look at the cash, and say 'This is ridiculous' and put their orders in, and probably big orders," said Lon Erickson, a money manager at Thornburg Investment Management Inc. in Santa Fe, New Mexico, who oversees $9 billion. "It will be scooped up like nobody's business."
Google, with total cash and marketable securities of $35 billion at yearend, according a regulatory filing, is tapping the corporate bond market as investment-grade borrowing costs tumble to about the lowest since November. Chief Executive Officer Larry Page, who replaced Eric Schmidt last month, is ramping up spending to expand in mobile and video advertising even as U.S. and European authorities mount investigations into the company's business practices.
The world biggest Internet-search company may sell three-, five- and 10-year notes today, said a person with knowledge of the transaction. The three-year notes may yield 33 basis points more than similar-maturity Treasuries, the five-year debt may pay a spread of 43 basis points and the 10-year securities may pay 58 basis points above benchmarks, said the person, who declined to be identified because terms aren't set.
AAA Pricing
At those suggested prices, Google, graded Aa2 by Moody's Investors Service and AA- by Standard & Poor's, would pay bond investors less than other AA rated companies have to offer to sell similar securities. The average spread on AA rated bonds was 105 basis points as of May 13, according to Bank of America Merrill Lynch index data.
The bond market is pricing Google's debt at the level of AAA rated companies, which pay an average spread of 59 basis points, the index shows.
The offering will give the Internet search provider more flexibility to spend cash in the U.S., Aaron Zamost, a Google spokesman, said in an e-mailed statement. As of March 31, Google's foreign subsidiaries held $16.9 billion, or 46%, of the company's cash and marketable securities, according to unaudited figures.
"We plan to use the proceeds to repay outstanding commercial paper and for general corporate purposes," Zamost said.
Reserves For Investigation
Google set aside $500 million related to the possible resolution of a U.S. Justice Department investigation of its advertising business, resulting in lower first-quarter profit.
The expense trimmed net income to $1.8 billion, or $5.51 a share, in the first quarter, Google said May 10 in a regulatory filing. The shares have fallen 9% this year to $529.55 on May 13 in Nasdaq Stock Exchange trading.
Until now the Mountain View, California-based company has relied on a short-term debt financing program that allowed it to borrow as much as $3 billion by issuing commercial paper, according to the quarterly filing. The debt has a weighted average interest rate of about 0.3% and weighted average maturity of about 163 days, it said today in a filing that didn't specify the size or maturities of the bond sale.
Commercial paper typically matures within 270 days and is used to finance everyday activities such as payroll and rent.
Yield Levels
The average yield on investment-grade debt sold in the U.S. fell to 3.78% on May 9, the lowest since Nov. 23, before rising to 3.8% at the end of last week, according to Bank of America Merrill Lynch index data.
Google Chief Financial Officer Patrick Pichette said in a December conference call that low interest rates hadn't lured the company into exploring financing through long-term debt.
"My job is to make sure that we have the perfect capital structure that fits our strategic needs," Pichette said. "If at the right time we decided that actually more long-term debt would make sense, right, we'd announce it."
Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. are managing today's bond sale, according to the regulatory filing.