Markets

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

The biggest technology companies have an uncanny ability to convince debt investors they’ll always be in style and have endless stockpiles of cash.

Even now, when bond buyers are becoming more discerning and defaults are rising, investment-grade tech companies have seemingly limitless access to capital markets. On Tuesday, Apple, IBM and Comcast were planning to sell billions of dollars of bonds with maturities as long as 30 years. They’re still likely to pay historically low overall rates to do so.

On one hand, this makes sense. These seem pretty rock-solid right now, with credit ratings of A- or above.

On the other, it seems as if bond investors feel overly comfortable with these companies considering that they've all but closed the door to speculative-grade corporations looking to raise cash.

Apple, for example, is planning a $12 billion offering, its fifth multibillion-dollar batch of bonds since 2013. It will use the proceeds for the fuzziest of endeavors, otherwise known as "general corporate purposes.'' In other words, it can do whatever it wants with the cash, including buying back its shares and making acquisitions. 

For stockholders, at least, recent bond sales to finance buybacks have worked out well as Apple's shares have climbed. But the move does nothing to help bond buyers, and it could eventually hurt if higher debt levels weakens the company's creditworthiness.

Meanwhile, as history has borne out, a company's use of cash can be savvy one minute and a millstone the next, especially in the fickle field of technology.

In late 2006, for example, Hewlett-Packard looked like a paragon of fiscal health, with $16.4 billion in cash, nearly $9 billion in free cash flow and just $2.5 billion in long-term debt. Over the next five fiscal years, the company spent nearly double the amount of its free cash flow on acquisitions and stock buybacks, even though its shares continued to fall, according to data compiled by Bloomberg. 

Some of its longer-term debt, such as its 6 percent notes maturing in 2041, have plunged in the wake of the company's decision to split in two, with prices falling to less than 80 cents on the dollar from 119.8 cents about a year ago.

Price Plunge
HP's bonds have plunged as the tech company tries to boost profits by splitting in two
Source: Finra's Trace

For now, the big, top-rated companies that are borrowing with abandon seem to be in good to great financial health. Apple has $38 billion of cash and short-term securities on its balance sheet and $70 billion of free cash flow a year, which could easily cover its roughly $56 billion of debt, Bloomberg data show. IBM perhaps isn't in as wonderful shape, because it's older and shrinking, but it still has loyal customers that guarantee steady annual revenues. Comcast is a similar story.

But these companies are borrowing for a long time, with two of them selling 30-year debt at a time when there's a lot of uncertainty about the global economy over the longer term. To get a sense of how long 30 years is for technology, look at Sun Microsystems. That company took less than three decades to launch, become one of the most dominant tech companies in the world, fizzle out and get sold for a fraction of its $200 billion peak market cap.

Today, as behemoth tech companies manage to round up investors whenever they want, those same bond buyers have absolutely no appetite for anything that seems to carry obvious risk. Junk-rated companies have sold just $14.4 billion of dollar-denominated bonds so far this year, the least for the period since 2003, Bloomberg data show.

Shunned Junk
Speculative-grade companies are selling U.S. bonds at the slowest pace since 2003
Source: Bloomberg

These tech companies may seem like a nice safe investment for debt buyers looking for havens, but they, too, still carry risk. It seems as if investors have no interest in recognizing that as they seek shelter.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net