Apple et al take advantage of US tax cuts, hurting other companies’ borrowing power
The cash-rich tech giants parked an increasing amount of their wealth into corporate debt in recent years
New York — As US tax cuts prompt Apple and other tech companies to bring home their overseas cash hoards, it’s leaving a void in the market for short-term corporate bonds, where those firms had invested much of the money. That’s now making it more expensive for other companies to borrow.
Once the biggest buyers of short-dated corporate debt, Apple along with 20 other cash-rich companies including Microsoft and Oracle have turned into sellers. While they once bought $25bn of debt per quarter, they’re now selling in $50bn clips, leaving a $300bn-a-year hole in the market, according to data tracked by Bank of America strategists.
The reversal is adding pressure to a market already buffeted by US Federal Reserve rate hikes. Yields on corporate bonds with maturities between one and three years have jumped 0.85 percentage points this year to 3.21%, close to the highest in almost eight years, Bloomberg Barclays index data shows. This increase has happened at a faster pace than longer-dated bonds, which tech companies bought less frequently.
For a company that relies on such debt to fund its operations, it’s the equivalent of $4.25m in extra interest costs each year for every $500m of debt issued. Many issuers are adapting by selling longer-dated debt, according to Bob Summers, a money manager at Neuberger Berman. But with the tech companies likely to bring home more cash until year-end, the market pains will only get worse, says Richard Saperstein, managing director at HighTower Advisors’s Treasury Partners.
"That wave of money, the directional change of fund flows hasn’t really kicked into gear yet," said Saperstein, who helps manage about $10bn, most of which is invested in corporate debt maturing in less than three years. "If the flow of money accelerates further and there isn’t enough absorption, spreads will widen."
Apple, Microsoft and Oracle were among the top 10 largest non-financial borrowers in the market last year ... This year, none of the three has sold bonds
The cash-rich tech giants parked an increasing amount of their wealth into corporate debt in recent years as yields on safer investments, such as treasuries, shriveled — a byproduct of central banks’ unprecedented efforts to keep rates low after the global financial crisis. Apple alone held more than $150bn in corporates, exceeding some of the world’s biggest debt funds.
That started changing earlier this year after a Republican-led tax overhaul in the US offered companies a break on the taxes they’d need to pay to repatriate their overseas profits. Within the first three months, companies had already brought back a record $306bn of dividends received from abroad, according to the Bureau of Economic Analysis. The total could reach $700bn by year-end, according to Strategas Securities.
More to come
Saperstein expects this could mean the extra yield over treasuries that companies have to pay on shorter-dated debt could increase another 10 basis points within the next six to 12 months.
The shrinking offshore cash piles have created other ripples in the market. Before the tax changes, many companies issued bonds to fund shareholder rewards at home while keeping their cash overseas and away from US tax collectors.
Apple, Microsoft and Oracle were among the top 10 largest non-financial borrowers in the market last year, issuing both short-term and long-term debt, data compiled by Bloomberg shows. This year, none of the three has sold bonds. Representatives for Apple, Oracle and Microsoft declined to comment.
It’s already making a dent in corporate-bond issuance. Sales of $888bn this year are down from $1-trillion for the same period last year, putting the market on pace to snap a seven-year run of rising debt sales. The drop would likely be even steeper if it weren’t for a global surge in mergers and acquisitions that’s fueling other funding needs.
The companies will likely return to the market when they need to refinance, but not with the same frequency or size, said Jon Duensing, director of investment-grade credit at Amundi Pioneer. So rather than the $30bn a company would issue each year at the peak of its cash-hoarding, it could come back with about $2bn annually, he said.
As for the interest rates on the debt, the days of borrowing for virtually nothing are in the past, analysts say. "I don’t see front-end selling by corporate treasuries changing anytime soon," says David Knutson, head of credit research for the Americas at Schroder Investment Management. The front end of the so-called credit curve, "will never be the same."