Why Do Big Cash-Flush Tech Companies Issue Bonds?


Despite huge cash reserves, three Big Tech companies just issued a load of debt. At first glance, one wonders: why bother? They can easily cover buyouts, acquisitions, and other needs with the money.

A sign of the times, the answer is that Amazon, Apple and Facebook’s parent meta-platforms are benefiting from still relatively low interest rates. Meta, for example, in its very first bond issue, offers a range of maturities from 5 to 40 years.

The reason people take on more debt, especially when it’s still relatively cheap, is that it improves a company’s capital and long-term growth prospects. And of course, interest on corporate debt is tax deductible. None of the three companies responded to requests for comment.

Debt “drives up stock returns,” says Robert Cantwell, founder and portfolio manager of investment firm Upholdings. “You want more debt than money.” Additionally, every corporate finance manager “knows that you’re raising money when you don’t need it; this is how you get the best deal.

Meta’s 5-year bond carries an interest rate of 0.75 percentage points over Treasury bills. With the 10-year T-note at 3.0%, that implies 3.75%. That compares favorably to the average rate for investment-grade companies for that term, 3.95%, according to the Federal Reserve Bank of St. Louis tally. The 10-year Meta bond is 1.75 points above the Treasury benchmark at 4.75%. That’s just a little above the company average for this term, 4.62%.

These three companies are far from highly indebted. Amazon, which issued its first bonds in 1998, has cash and cash equivalents of $37.4 billion, with a healthy debt-to-asset ratio of 37%, according to Bloomberg data. Apple’s cash is even larger, $48.2 billion, for a debt ratio of 36%. The iPhone maker issued its first bonds in 2013. Meta, new to the bond market, sports $40.5 billion in cash, with a leverage ratio of just 6%.

It helps that these three recent debt issuers have good credit ratings. Standard & Poor’s rating for Amazon is AA (three levels below AAA, the top level). Apple’s rating is AA+ and Meta’s is A-, likely due to its limited credit history. Moody’s Investors Service assigns them comparable ratings.

Moreover, the interest rates they pay are well below inflation; the consumer price index is now 8.5% per year. “And interest rates will go up,” Cantwell observes, due to the Federal Reserve’s campaign to stifle high inflation.

Admittedly, Meta has seen some erosion of its Facebook user base and is spending heavily to grow in the multiverse. Yet, it still generates significant revenue. The trading performance of the trio of debt issuers is “very good”, says Cantwell.

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Tags: Amazon, Apple, Big Tech, Bonds, cash, credit ratings, debt ratio, interest rates, meta-platforms, Standard & Poor’s


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