Corporate Bonds on Bloomberg Taking a Stroll With Microsoft - WPTA 2018

Corporate Bonds on Bloomberg
 Taking a Stroll With Microsoft
           WPTA 2018

Fixed Income Bloomberg Functions
               In Order of Presentation
   DES  - for Description of particular bond
        MTN? Large benchmark? Callable? Structure?
   CRPR – Stable credit ratings? On Watch? Outlook?
   CAST – Capital Structure
   DDIS – Existing debt
   DRSK – Default Risk; IG1? Unlikely to lose sleep
   CSHF – Cash Flow page for MW Premium
   YAS – for pricing bonds
   CN – news headlines, any pending problems?
   RELS - related securities
   RVRD – relative value ranking
   WACC – issuer’s weighted average cost of capital

START WITH THE EASY STUFF

Some Questions to Consider
• Where does my bond rank in the food chain if the company goes
  belly up?
• What is the company’s financial wherewithal to pay me back?
• Is the company a viable going concern over the time horizon I’ll
  own the bond?
• Will the company be able to maintain its credit ratings over my
  time horizon?
• Does the company have headline risk that could lead to lowered
  credit ratings?
• Will I lose money if the bonds are called before maturity?

  Nothing on the Bloomberg description page will answer these questions!

Bloomberg “DES ”

What Do I Know From “DES ”

Microsoft Credit, 2.4% coupon, maturing 2/6/22.
•   Rated Aaa/AAA/AA+
•   It’s a $1.75B Global deal issued in January 2017
•   It is considered Sr. Unsecured debt
•   Bond has Make Whole call provision until 1/6/2022
•   Make Whole provision is 10 basis points over comparable treasury (found in bond
    indenture)

Bond Ratings

Bond Ratings

Unfortunately this screen doesn’t allow me to see credit rating history.

Bloomberg “CRPR ” for Credit Rating Profile

 From here you can scroll over the different line items and pull up historical
 information.
 • I’m curious about Moody’s & Fitch “Senior Unsecured Debt” ratings

“CRPR” Moody’s Sr. Unsecured Rating History

When I click on Moody’s Senior Unsecured Debt I get history
• MSFT has been triple-A by Moody’s since 2009
• Moody’s had the company on negative watch from June 13, 2016 – July 25,
  2016. Very short time frame – obviously something going on with the credit.
  Would have to research news headlines from that time.

“CRPR” Fitch Sr. Unsecured Rating History

       Fitch is not so generous with its credit ratings

“CRPR” S&P LT Local Issuer Credit Rating History

“CRPR” S&P Credit Rating Outlook

Other Bloomberg Pages For Analysis

• CAST
• DDIS
• DRSK

“CAST” Capital Structure

Microsoft has a very simple capital structure. But….
• If you click on Current Issuer, the issues of Sr. Unsecured Bonds drops to 44, so
  this says to me MSFT has responsibility for subsidiary debt

“CAST”  for Capital Structure Company Information

Note on upper right-hand side there is a drop-down menu
• Current Issuer – gives you “unconsolidated” debt – won’t include subsidiaries
• Current Issuer & Subsidiaries
• Current Issuer & Guaranteed – will show issuer and additional guaranteed debt

“CAST” Capital Structure Find Subsidiaries
     Then Click on – Security Detail

         I forgot MSFT bought LinkedIn!

“CAST” Capital Structure

Here is LinkedIn with its own ticker. It does not appear to have recourse to
the parent.

“DDIS ” Debt Distribution

On the right-hand side’s drop-down menu, I chose Parent & Subsidiaries to
capture 47 issues – which consists of 45 senior unsecured corporate bonds
and two senior unsecured revolvers with JPM.

And I chose Principal & Interest

“DDIS  Summary Statistics”

From this page I can see there are two outstanding bank revolvers. If I
click on that I can pull up the individual securities.
• 1st is $5B from JPM to backup MSFT’s outstanding CP. It matures in
    Oct. 2018
• 2nd is a $5B from JPM for general corporate purposes and matures
    Oct. 2022
• Both are unsecured and neither is maxed out.

“DDIS  History by Debt Type”

“DDIS  History by Payment Rank”

Here you don’t see the revolvers broken out.
But they do rank pari passu with the other Sr. Unsecured debt.

“DRSK ” for Bloomberg Default Risk I LOVE THIS!!!

Here I chose history of 5 years.
The purple boxes are time periods of corporate actions, such as
acquisitions.

Bloomberg Default Risk “DRSK ”

In the lower right-hand chart, MSFT is represented by the vertical blue line. Bars
to the right represent default risk for lesser quality companies considered to be
peers.

Bloomberg Default Risk “DRSK ”

I like how this page incorporates the some of the balance sheet and
income statement variables we need to consider.

Now Let’s Just Look at the Bond

Bloomberg “DES ”

Calculate MW Call Price as of Settlement via “CSHF” 

Typically the MW provision is calculated as the present value of remaining principal and interest
discounted by the Fed’s CMT curve for the remaining time to maturity.

In Bloomberg the CMT curve is I552

Using CSHF and clicking on the Present Values tab you can fill in the table.
• The spread is 10 basis points
• The curve is IYC 552

As of purchase settlement the MW call price would be approx. $99.300.
• You do not want to pay through the MW call price.

OFFERED +23/CT 5YR-TSY
               Works out to $98.194 / 2.90%

What does this bond offer relative to a comparable agency bullet?
    • ICUR 2/6/22 #26 = yield for comparable agency in this case 2.605%
    • So it picks 29.5 bps over an agency bullet
    • Is this enough compensation for the credit & structural risk?
    • At least I can buy it at a lower price than the MW provision.

NOW FOR THE HARD PART

Covenants

Covenants

No negative pledge. No change of control.
Yes Negative Covenant
Yes Certain Sales of Assets – click on icon

Covenants – “Certain Sales of Assets”

Clicking on the icon brings up the related section in the Prospectus dated Nov. 2,
2012
      • SEC Form S-3 Registration Statement

Scroll to the top of this document in Bloomberg and you can find some
information regarding the bond’s indenture….

MSFT Prospectus Dated Nov. 2, 2012

We will issue the debt securities in one or more series under an indenture between us and The Bank of
New York Mellon Trust Company, N.A., as trustee.

The following summary of provisions of the indenture does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all of the provisions of the indenture, including definitions therein of certain terms. This
summary may not contain all of the information that you may find useful. The terms and conditions of the debt
securities of each series will be set forth in those debt securities and in the indenture. For a comprehensive description
of any series of debt securities being offered to you pursuant to this prospectus, you should read both this prospectus
and the applicable prospectus supplement.

The indenture has been filed as an exhibit to the registration statement of which this prospectus
forms a part. A form of each debt security, reflecting the specific terms and provisions of that series of debt
securities, will be filed with the SEC in connection with each offering and will be incorporated by reference in the
registration statement of which this prospectus forms a part. You may obtain a copy of the indenture and any
form of debt security that has been filed in the manner described under “Where You Can Find More
Information.”

Unfortunately this blurb does not provide the date of the indenture.

Back to Bloomberg Screen

Click on #36 on left-hand side for Prospectus

#36 CF Prospectus

Here we go!!! Thank you Microsoft!
• Prospectus for this bond deal
• Related Indenture

Click on any of these to download.
• Unfortunately the indenture download is not in PDF and is not friendly

Corporate Bonds are “Structurally” Opaque

Bloomberg description page doesn’t tell you much.

     – Unclear where you rank in food chain
        • Almost non-existent information regarding underlying bond indenture

•   There may not be a link to a prospectus.

•   No links to financial statements or financial ratios

Buy What You Know??

Local names you may see include:
    –   Boeing (A2/A)
    –   Costco (A1/A+)
    –   Microsoft (Aaa/AAA/AA+)
    –   Nike (A1/AA-) – sold debt in October 2016 without covenants.
    –   Paccar (A1/A+)

Many companies sell debt that is not particularly bondholder friendly.

Bloomberg Pages For Financial Analysis

• RELS
• RVRD
• WACC

Bloomberg Related Securities “RELS ” Chart

Bloomberg Related Securities “RELS ” Table

Bloomberg Related Securities “RVRD ”

Bloomberg Related Securities “WACC ”

Click on “Create Report” at top of page to print this out in a pretty PDF.

Equity Function for Financial Analysis

If the issuer is publicly traded then you can use the Equity Function to
analyze the credit.

Using Equity Functions for FA

Bloomberg Equity Function – “Bloomberg Primer”

Bloomberg Equity Function – “Bloomberg Primer”

Bloomberg Equity Function – “Bloomberg Primer”

Bloomberg Equity Function – “Relative Valuation”

Bloomberg Equity Function – “CN” for Company News

Equity Function Company Filings

Equity Function Company Filings

Equity Function For ESG!!
Provided Company Supplies The Information

Equity Function Financial Analysis – “Key Stats”

Equity Function Financial Analysis – “Ratios”

Leverage “Ratio” is a Misnomer
Purpose – measure of company’s debt burden
Several different ratios categorized as leverage ratio – but all contain:
     –   Amount of Debt
     –   Amount of Equity
     –   Total Assets
     –   Interest Expense
• Total Debt / Total Equity – most common
     – In general if > 2, then potentially risky
     – Industries with intensive capital expenditures typically rely on more loans
• Total Assets / Total Equity – referred to as “equity multiplier”
     – Implies total assets includes debt
     – Higher number means assets mostly funded with debt
• Total Debt / Total Capital = where Total Capital = Total Debt + Shareholder’s Equity
•   Long-term Debt / (LT Debt + Shareholder’s Equity)

Financial Statements

• Take time to scan over latest audited financial statement
    –   Will find this on Company’s web site
    –   Annual Report
    –   10K
    –   10Q
• Look over the auditor’s opinion to ensure there were no findings or
  restatements.

Equity Function Financial Analysis – “Segments”

Equity Function Financial Analysis – “Additional”

Love this for R&D

Equity Function Financial Analysis – “Income Statement”

Equity Function Financial Analysis – “Balance Sheet”

Equity Function Financial Analysis – “Cash Flow”

Equity Function “Earnings & Estimates”

BI Linked Spreadsheets – Super Cool!

I accessed this by clicking on a link inside of a BI research report on Honeywell.