Short-term debt


Notes to Financial Statements

NOTE 10    DEBT

In September 2010, we issued $4.75 billion of debt securities. See further discussion of these securities under “Notes” below. As of September 30, 2010, we had $10.7 billion of issued and outstanding debt comprising $1.0 billion of commercial paper and $9.7 billion of long-term debt, including $1.3 billion of convertible debt.

Short-term Debt

As of September 30, 2010, our $1.0 billion of commercial paper issued and outstanding had a weighted average interest rate, including issuance costs, of 0.19% and maturities of 29 to 42 days. The estimated fair value of this commercial paper approximates its carrying value.

We have a $1.0 billion 364-day credit facility, which expires on November 5, 2010, and which serves as a back-up for our commercial paper program. As of September 30, 2010, we were in compliance with the financial covenant in the credit facility agreement, which requires a coverage ratio be maintained of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense. No amounts were drawn against the credit facility during any of the periods presented.

 

Long-term Debt

Notes

As of September 30, 2010, we had issued and outstanding $8.5 billion of debt securities as illustrated in the table below (collectively “the Notes”), including $4.75 billion of debt securities issued in September 2010. The Notes are senior unsecured obligations and rank equally with our other unsecured and unsubordinated debt outstanding.

Convertible Debt

In June 2010, we issued $1.25 billion of zero coupon convertible unsecured debt due on June 15, 2013 in a private placement offering. Proceeds from the offering were $1.24 billion, net of fees and expenses, which were capitalized. Each $1,000 principal amount of notes is convertible into 29.94 shares of Microsoft common stock at a conversion price of $33.40 per share.

Prior to March 15, 2013, the notes will be convertible, only in certain circumstances, into cash and, if applicable, cash, shares of Microsoft’s common stock or a combination thereof, at our election. On or after March 15, 2013, the notes will be convertible at any time. Upon conversion, we will pay cash up to the aggregate principal amount of the notes and pay or deliver cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

Because the convertible debt may be wholly or partially settled in cash, we are required to separately account for the liability and equity components of the notes in a manner that reflects our nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. The net proceeds of $1.24 billion were allocated between debt for $1.18 billion and stockholders’ equity for $58 million with the portion in stockholders’ equity representing the fair value of the option to convert the debt.

In connection with the issuance of the notes, we entered into capped call transactions with certain option counterparties who are initial purchasers of the notes or their affiliates. The capped call transactions are expected to reduce potential dilution of earnings per share upon conversion of the notes. Under the capped call transactions, we purchased from the option counterparties capped call options that in the aggregate relate to the total number of shares of our common stock underlying the notes, with a strike price equal to the conversion price of the notes and with a cap price equal to $37.16. The purchased capped calls were valued at $40 million and recorded to stockholders’ equity.

As of September 30, 2010, the total carrying value and estimated fair value of our long-term debt, including convertible debt, were $9.7 billion and $10.1 billion, respectively. The estimated fair value is based on quoted prices for our publicly-traded debt as of September 30, 2010, as applicable.

The components of long-term debt as of September 30, 2010 were as follows:

 

(In millions)       


Zero coupon convertible notes due on June 15, 2013

   $ 1,250   

0.875% Notes due on September 27, 2013

     1,000   

2.95% Notes due on June 1, 2014

     2,000   

1.625% Notes due on September 25, 2015

     1,750   

4.20% Notes due on June 1, 2019

     1,000   

3.0% Notes due on October 1, 2020

     1,000   

5.20% Notes due on June 1, 2039

     750   

4.5% Notes due on October 1, 2040

     1,000   

Unamortized discount

     (85


Total

   $   9,665   
    


Interest on the 2013 Notes is payable semi-annually on March 27 and September 27 of each year to holders of record on the preceding March 15 and September 15. Interest on the 2014, 2019 and 2039 Notes is payable semi-annually on June 1 and December 1 of each year to holders of record on the preceding May 15 and November 15. Interest on the 2015 Notes is payable semi-annually on March 25 and September 25 of each year to holders of record on the preceding March 15 and September 15. Interest on the 2020 and 2040 Notes is payable semi-annually on April 1 and October 1 of each year to holders of record on the preceding March 15 and September 15.