Investors like Meta's US$10bn debut bond

IFR 2445 - 06 Aug 2022 - 12 Aug 2022
5 min read
Americas, EMEA
Sunny Oh

Facebook parent Meta Platforms raised US$10bn from its first ever corporate bond sale on Thursday, adding to the list of cash-rich technology companies including Alphabet, Apple and Microsoft which have all issued bonds.

Many of the household tech names made their debuts in the corporate bond market much earlier than Meta. Microsoft made its inaugural offering in 2009, Amazon in 1998 and Apple in 2013. Some, such as Apple, issued debt even earlier via convertible note offerings.

Though flush with cash, these tech giants have continued to be active in the new-issue market, with Apple and Amazon printing large bond deals this year.

With little leverage on its balance sheet and its ample cashflows, Meta benefited from the low borrowing costs commanded by its big tech counterparts, said market participants, especially on an inflation-adjusted basis. US consumer prices have risen 9.1% in the year ending in June.

Led by Bank of America, Barclays, JP Morgan and Morgan Stanley, the four-part offering followed investor calls held on Wednesday. Bookrunners priced the US$2.75bn five-year, US$3bn 10-year, US$2.75bn 30-year and US$1.5bn 40-year at Treasuries plus 75bp, 115bp, 145bp and 165bp, respectively. Each portion saw around 15bp of price progression from initial marketing.

As expected for a large, inaugural issue from a high-profile borrower, the offering landed an impressive order book of US$31bn, according to a source familiar with the deal.

Flush with cash

The Menlo Park-based company reported US$40.5bn of cash and marketable securities on its balance sheet in June. Meta is also producing a fountain of earnings. It reported more than US$119bn in revenues and over US$54bn in Ebitda over the one-year period ending in March, according to Moody's.

"Meta does not ‘need’ to issue, but it lays the groundwork for future issuance and establishes a basic capital allocation and leverage framework for the market," said Nate Liddle, senior analyst at Columbia Threadneedle.

That future issuance could come in handy as the company ramps up its spending.

"They are attempting an expansion path and financing it with debt when they can still do it cheaply, which is a strategy Apple has used for years," said Adam Coons, a portfolio manager at Winthrop Capital Management.

Since rebranding itself as Meta, the parent company of WhatsApp, Facebook and Instagram has been investing heavily in cash-hungry projects including its virtual reality and metaverse division, which has cost the company billions in losses.

Meta is expecting capital expenditure to come in the range of US$30bn–$34bn in 2022, David Wehner, its chief financial officer, said during the company's earnings call on July 27.

The company is also conducting large share buybacks, repurchasing US$14.7bn of shares in the first half of the year.

Quality attracts

On Monday, the tech giant received an A1 rating from Moody's and an AA– rating from S&P.

That rating allowed Meta to capitalise on demand for high quality credits, with buyers in the primary market weighting their interest towards issuers with stronger prospects in the face of concerns that the US Federal Reserve will tighten financial conditions and tip the US economy into a recession.

But some said Meta should price wide of other Double A rated technology companies. Analysts at CreditSights argued the challenges facing the company, including the potential for new entrants into the social media industry, warranted a bigger spread between the 10-year and the 30-year.

They estimated fair value of that step-up for Meta would be around 40bp, versus the 27bp for Apple and Amazon. In the end, Meta managed to secure a spread of 30bp between the two tenors.

40-year return

Meta surfed a wave of deals in the US investment-grade primary market which recorded nearly US$58bn of issuance in the first four days of the week, putting it well on pace to exceed the around US$77bn of deals that syndicate bankers had expected in August, according to a Credit Flow Research survey.

Market participants cited the recent decline in interest rates for the hectic pace of issuance. The 10-year Treasury yield ended at 2.67% on Thursday, sharply down from an 11-year high of 3.48% touched in mid-June.

"It's the longest period of stability we've had in rates for a while," said a second banker.

That calm helped revive the market for the 40-year tenor, issued by Apple, Intel and Meta in last week's borrowing binge. With their large multi-part bond offerings, Apple and Intel helped establish that there was rich demand for tech bond deals spanning the yield curve. Apple raised US$5.5bn on Monday and Intel issued US$6bn on Tuesday from deals that both included seven, 10, 30 and 40 year tenors.

Prior to those deals, the last high-grade issuer to have sold the ultra-long maturity was California-based semiconductor company KLA in June, according to IFR data.