In finance, one way to make a project work if its cash flows don't look so good is to reduce the discount rate. The less a company pays for money, the easier it is to invest in things that will make that firm more valuable. Of course, those investments could also turn out to be duds. That's something Toyota shareholders should bear in mind after the carmaker raised 20 billion yen ($187 million) selling three-year bonds at a 0.001 percent coupon. At that price, even the most outlandish proposals may start looking good.
Toyota's coupon is the lowest ever for a Japanese company not backed by the government. And it already has a world-beating six fixed-rate securities with coupons equal to or less than 0.1 percent, according to data compiled by Bloomberg.
Most other firms in that category are state-owned Japanese or European ones that typically invest in infrastructure. Others that are free from sovereign backing include Eli Lilly, Sanofi and Unilever, corporations that, like Toyota, depend heavily upon research and development.
Toyota did say in its annual report that it's putting more money into self-driving cars. But that's probably not the reason it's just raised so much debt at almost no cost. It's doing so because it can. As one of the most-recognized names in Japan, Toyota's bonds rank right up there with the government itself.
For shareholders, that should be good news. As a company's cost of capital drops, textbook accounting says its return on equity should increase.
Unfortunately, the second part of that equation is yet to fully play out. Toyota's return on equity as calculated by Bloomberg has improved from recent lows but is still short of highs reached before the credit crisis.
Finance professors often say that the danger of very low costs of capital is that investments that wouldn't normally make sense start showing as profitable. The risk for investors in Toyota is that money becomes so cheap the automaker starts throwing funds at ideas best skipped.
Toyota's ability to pay next to nothing for debt should translate into returns for shareholders. If it doesn't, questions need to be asked about what it's doing with all that cash and perhaps more importantly, does it need to be raising it in the first place.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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