Moody's might downgrade Microsoft's perfect 'AAA' debt rating because of tech company's deal with LinkedIn

REUTERS/Lucas Jackson

While there is a compelling case that Microsoft's massive $26.2 billion purchase of LinkedIn will be good for business, it may force Microsoft out of the ranks of the debt elite.

Credit-rating agency Moody's has placed Microsoft's perfect "AAA" rating under review after the tech giant announced that it would issue new debt in order to finance the takeover of LinkedIn.

Microsoft is one of only three companies to have the perfect "AAA" rating from the agency, along with Johnson & Johnson and ExxonMobil.

The amount of debt needed to complete the transaction worried Moody's, according to a release from the agency.

"Funding the acquisition entirely with debt, however, will increase Microsoft's gross debt to EBITDA to approximately 2.0 times, in excess of 1.5 times leverage Moody's has previously noted could pressure the rating," said Richard Lane of Moody's in the release.

According to consultant firm Freeman & Co., the company probably won't need to finance the whole deal with debt, but around $15 billion will be issued.

This sort of review is not uncommon following a debt-financed merger. Microsoft also underwent a review after its acquisition of Nokia in 2013.

According to the Moody's release, there will be multiple parts of the review taking in the whole scope of the deal and Microsoft's business.

Moody's said:

Moody's review will focus on the strategic fit and monetization opportunities of LinkedIn with Microsoft's software offerings.

The review will also consider Microsoft's plan, if any, to reduce and sustain gross leverage at or below 1.5 times while maintaining a significant net cash position. An additional consideration will be Microsoft's capital allocation plans and the potential need to raise debt to support shareholder returns.

If a downgrade does occur, said Moody's, then it would likely be only one notch to "AA1."

This may not be the end of the world, since, as some observers pointed out, interest expenses are tax deductible. So, if Microsoft has a lower rating, then it would cost more to borrow money, leading to higher tax-deductible interest expenses. It might then actually save money on net depending on how much the firm can write off on its taxes.

So a potential downgrade may look bad, but only time and taxes will tell.

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