Will Alphabet’s century bond start a new trend? A brief history
This week Google owner Alphabet raised £1bn in a highly unusual century bond, in a sign of the extreme lengths tech firms are willing to go to to meet the ballooning capital costs of investment in AI.
The 100 year sterling note formed part of a $32bn debt raise for Alphabet, following similar moves from Meta and Oracle. All of it will likely go into AI – with Alphabet warning its capital expenditure is set to hit $185bn this year, more than double what it spent last year.
Century bonds are a rare beast, with Alphabet joining the ranks of only a few dozen firms who have ever attempted this form of financing.
According to S&P data, only around 360 bonds with a maturity of 100 years or longer have been raised over the past 40 years – an average of 9 per year.
The last big century bond frenzy took place in the mid 1990s, with 1997 being the record year with some 40 bonds raised.
During that time a lot of big US firms got in on the act – from major carmakers like Ford and Chrysler, to pharma giant Bristol Myers-Squibb, to telco Bellsouth and food processor Archer Daniels Midland.
Tech firms also jumped on the bandwagon, with IBM completing a $500m raise in 1996 and Motorola raising $300m in 1997.
According to Bloomberg, the 1997 Motorola deal is the last such century bond issue by a tech firm until Alphabet arrived on the scene this week – though arguably, that crown should go to Rockwell Automation, a Wisconsin-based software and digital transformation business which raised a $200m 2098 bond a year later.
Universities revive the century bond market
More recently, infrastructure firms and universities have revived the century bond market. The Canadian Pacific Railway Company issued a $900m bond in 2015, while Georgia based railfreight business Norfolk Southern raised $600m in 2021. MIT raised $500m in 2014, while Oxford raised £750m in 2017.
Why sterling? Analysts say there is plenty of appetite for long-dated debt such as this from UK pension funds – while the pound’s current strength could bring down Alphabet’s borrowing costs in the years ahead.
The tech giant has also pledged to invest £5bn in the UK, and those pounds have to come from somewhere. As I reported in December, the firm recently ploughed another £775m into its UK data centre subsidiary, and there will likely be more where that came from.
How well will the bond perform? Century bond issuance has typically followed a period of tumbling interest rates, making longer-dated debt more attractive for investors. The arrival of these bonds have a habit of signalling the top of a market, some say. Oxford University’s century bond is now trading at less than a third of what it was five years ago.
But Alphabet’s £1bn bond was heavily oversubscribed – even more so than the shorter-term sterling tranches it sought to raise at the same time – with nearly £10bn in bids. The combined sterling raise of £5.5bn sets a fresh record for a single corporate bond sale in the sterling market sailing past National Grid’s £3bn sale in 2016.
“It offers something that is very different to what else is out there,” one City trader tells me.
“And if you’re issuing £5.5bn in bonds it becomes such a large part of the index so quickly that to some extent you need to own a portion of it — otherwise you’re going to be underweight duration, underweight Alphabet exposure, underweight everything relative to everyone else.”
If that is anything to go by, and given AI’s unquenchable thirst for cash, this unusual Big Tech century bond is unlikely to be the last.