US technology companies appear to be moving away from their historic reliance on the stock markets to raise funds and are increasingly turning to the bond markets.
They have issued more bonds already this year than in any year since 2002, when they were struggling through the aftermath of the tech bubble bursting.
Oracle, the software group, sold $5.75bn in January in its first debt sale in nine years. Systems provider Cisco topped that and created a record for the biggest-ever debut bond issue with a $6.5bn sale last week. The two deals, at more than $12bn combined, are already close to the annual $14bn or so that was issued between 2000 and 2002, according to Dealogic.
The flurry of activity partly reflects the attractiveness of market conditions for all borrowers. But it also has something to do with the increasing size and slowing, if still healthy, growth of some technology companies.
“Historically the tech sector has relied on the equity markets,” says Raj Dhanda, head of debt capital markets at Morgan Stanley. “But the sector has matured to the point where there are some large-cap tech companies that look more similar to other traditional corporate borrowers.”
Tech stock growth, and therefore the value of equity as an acquisition currency, is also still far from what it was in the heady days of the dotcom boom, making the bond market a more attractive option for fund raising.
Both Oracle’s and Cisco’s deals were issued to fund the acquisitions of Siebel Systems and Scientific Atlanta, respectively, and more could be on their way.
“Now that you have these two, there can’t be a medium or large tech company that won’t ask the question,” says Mr Dhanda, although he added some caveats.
“There needs to be a use of proceeds that excites them, an obvious acquisition that is strategic and makes sense.” Leon Burger, credit analyst at Principal Global Investors, adds: “It is probably going to depend on acquisition activity and how big some of those are.”
Currently, investor appetite seems strong. The “book” – where bankers record potential investors’ bids – built for Cisco’s offering was about $20bn and the biggest seen in recent years according to market sources.
More than 400 different investors bid for the paper. Part of the demand for both came from the chance for investors to diversify.
“There really wasn’t much in the software space,” says Mr Burger.
“They’re looking for a new corporate borrower and a large cap company,” says Mr Dhanda.
“These will be the among the most liquid benchmark bonds to trade for the next six to 12 months.”
Both Cisco and Oracle were able to increase the size of their deals due to the strong demand. Cisco had originally planned to issue $5.5bn and despite the $1bn increase, still priced the deal at the better end of market expectations.
Its bonds have since performed strongly in the secondary market with the “spread” over comparable Treasury yields narrowing since they were issued.
However, Oracle’s have done less well amid market chatter that many of the bonds went to “fast money investors” who sold it on quickly, potentially weakening the market. “The biggest difference is that Cisco is rated two notches higher by the agencies yet the pricing was 5 basis points wider than the Oracle deal,” says Dave Novosel at Gimme Credit, a research group, which rated Cisco’s bonds a “buy”.
Investors also seemed to warm to the size of both companies, which suggests they will be free from the risk of leveraged buyouts, which can weaken credit quality.
“These two names have market caps so huge you don’t have to worry about LBO risk,” says Mr Burger.
But should investors be worrying instead about the chances of further acquisitions in-stead? “The biggest risk with Cisco is that it undertakes a large acquisition,” says Mr Novosel, who nonetheless thinks any likely purchase would be too small to materially affect the company’s credit profile. “There are not many logical candidates available,” he adds.