Gearing Up for Growth - Microsoft Sources Huge Debt Finance

Debentures (or company bonds) are very much back in fashion and the recent use of debt finance by Microsoft to pay for its takeover of LinkedIn is a good example of why.

Microsoft has raised around $20bn of new debt finance by issuing a new series of corporate bonds. As the video below explains, the demand from investors for these bonds was very strong; if it wanted to Microsoft could have raised around $50bn of new debt finance.

Why? Microsoft, like other high profile and highly profitable companies, is seen as a safe bet. The bonds, which can be traded on the open market, offer a decent yield (rate of interest) which is exactly what financial institutions such as pension schemes are looking for right now.

Does this create a gearing problem for Microsoft? No. The business still has enormous cash reserves and is easily able to finance the interest on the bonds.