CHICAGO–(BUSINESS WIRE)–Fitch Ratings has assigned an ‘AA+’ rating to Microsoft Corporation’s
(Microsoft) $13 billion senior notes offering. Pro forma for the senior
notes issuance, Fitch’s ratings affect $51.7 billion of total debt. A
full list of current ratings follows at the end of this release.
KEY RATING DRIVERS
Microsoft issued $13 billion of senior notes with various maturities to
be used for general corporate purposes. Fitch expects Microsoft will use
net proceeds mainly for stock buy backs given the company’s plan to
complete the $17.9 billion remaining under the current $40 billion share
repurchase authorization by Dec. 31, 2016.
Microsoft has $99.4 billion in cash and short-term investments but only
$3.4 billion of cash and short-term investments were held in the U.S. as
of Sept. 30, 2015. Fitch expects incremental debt to fund domestic cash
requirements including aggressive shareholder returns, given the
company’s reluctance to repatriate foreign earnings, resulting in weak
total leverage (total debt to operating EBITDA) for the rating.
Nonetheless, Fitch expects supplemental adjusted net leverage, which
nets adjusted offshore cash and investments against debt balances, will
remain below 1.5x. Fitch estimates supplemental adjusted net leverage
was roughly 1x for the latest 12 months (LTM) ended Sept. 30, 2015, pro
forma for the new senior notes.
KEY RATING DRIVERS
The ratings and Outlook are supported by:
–Fitch’s expectations that Microsoft Windows will remain the primary
operating system (OS) for servers and PCs, despite lackluster adoption
of Windows 8 and 8.1 for PCs, supporting significant annual free cash
–Microsoft’s recurring revenue base related to long-term commercial
licensing agreements, which represents more than half of total revenues.
–Fitch’s expectations that increasing adoption of enterprise cloud
services will further diversify Microsoft’s revenue base and increase
profitability, reducing the company’s exposure to the less defensible
and profitable consumer PC market.
Ratings concerns center on Fitch’s expectations that:
–Microsoft will continue relying on the PC market for the vast majority
of FCF, although Fitch expects faster growing cloud services could
reduce this risk over the longer term.
–Competing free or lower cost operating systems may continue reducing
Microsoft’s share, primarily in consumer and education markets.
Microsoft competes with Google in the tablet and smartphone markets
(Android – roughly 80%) and in the notebook PC market (Chrome).
–Success in smartphone and tablet markets could remain modest (below 5%
share), despite significant investments and resource allocation.
–Sustained consumer PC demand weakness, with the exception of Office
365 (SaaS), driven by extended PC replacement cycles from tablet and
–Significant dividend and share repurchase programs are likely to
continue pressuring the company to issue debt to avoid repatriation of
Fitch’s key assumptions within the rating case for the issuer include:
–$17.9 billion of share buybacks by the end of December 2016.
–Microsoft does not repatriate overseas cash to the United States.
–Annual FCF of $12 billion – $15 billion.
–Capital spending will remain elevated to support cloud infrastructure
–Dividends between $10 billion and $12 billion over the ratings horizon.
Negative: Future developments that may, individually or collectively,
lead to negative rating action include:
–Fitch’s expectations that supplemental adjusted net leverage (total
debt netted against adjusted cash and investments held outside the U.S.)
above 1.5x from significant debt issuance to support shareholder returns.
–Material profit margin erosion related competitive pressures,
including strong commercial adoption of the public cloud and/or
open-sourced software materially reduces demand for key Microsoft
products; penetration of alternative operating systems in the PC market
or market share gains by Apple; or greater acceptance of cheaper
software applications that compete with Microsoft Office.
Positive rating actions are unlikely in the absence of material
diversification, driven by solid organic growth in non-PC businesses.
As of Sept. 30, 2015, Fitch believes liquidity is very strong and
–$99.4 billion of cash and short-term investments, of which $3.4
billion was in the U.S.;
–An undrawn $5 billion revolving credit facility (RCF) expiring Nov.
14, 2018 and an undrawn $5 billion RCF expiring Nov. 4, 2015, both of
which backstop the company’s commercial paper (CP) program;
–Fitch’s expectation for $12 billion to $15 billion of annual FCF also
Pro forma for the senior notes issuance, total debt was $28.6 billion at
Sep. 30, 2015 and consisted of various tranches of senior notes with
staggered debt maturities and $5 billion of CP borrowings. Microsoft’s
nearest debt maturity, aside from CP borrowings, is $750 million of
senior notes due Feb. 8, 2016.
FULL LIST OF RATING ACTIONS
Fitch currently rates Microsoft as follows:
–Long-Term IDR ‘AA+’;
–Senior unsecured debt ‘AA+’;
–Short-Term IDR ‘F1+’;
–CP program ‘F1+’.
Relevant Committee: April 20, 2015
Additional information is available on www.fitchratings.com
Corporate Rating Methodology – Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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