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.

Technology companies have sold more than $100 billion of bonds so far this year, which seems like a lot considering that's equal to the size of Ecuador's economy and bond issuance is poised to set a new record.

But it's really not. It's a drop in the bucket for these companies. And it would be surprising if the tech bond binge doesn't accelerate in the coming months and years. Already this year, tech companies have sold about as much investment-grade U.S. debt as they did in all of 2015, and double the level of 2014. 

Tech Explosion
Technology companies are selling U.S. bonds at an accelerating pace this year
Source: Bloomberg

Apple, Microsoft and Google parent company Alphabet are responsible for more than 40 percent of the 2016 tech bond sales. Those three companies don't really need the money; they have a combined $423 billion in cash plus short- and long-term securities. But most of their cash is parked overseas, and if the companies tapped the cash they would have to pay U.S. corporate income taxes.

Bond buyers are helping fill the cash gap. Microsoft this week sold $19.75 billion in bonds to help pay for its proposed acquisition of LinkedIn. Apple in recent days sold $7 billion in bonds -- its seventh multibillion-dollar debt sale since 2013 -- to finance its huge share repurchases and dividends to stockholders. Alphabet is using its $2 billion of fresh bond sales to repay old debt.

Combined, the companies are paying roughly $4.6 billion of coupon payments on all their bonds. That's equal to less than a week of Apple's sales. And it's laughably dinky compared with the $130 billion these companies would have to pay in taxes if they repatriated the cash they hold overseas.

The Taxman (Doesn't) Cometh
Microsoft, Apple and Google's parent company hold most of their cash and investments abroad, where they aren't subject to U.S. taxes. If they paid income taxes on the overseas cash, it would amount to a collective $130 billion.
Sources: the companies
Note: Cash and investments are as of the end of June. Apple's cash holdings also include long-term securities.

Let's say Apple, Microsoft and Alphabet didn't raise money through bond sales and opted to bring money home from some other country. They'd have to pay about $59.5 billion in taxes. In comparison, that $4.6 billion looks like pocket change.

And it's even more of a bargain than it looks. These tech companies also get favorable tax treatment for incurring debt because any interest paid is deducted from its pretax profits.

What's more, they're borrowing at ever-lower rates and for longer periods. Microsoft just sold $2.25 billion of bonds that mature in 2056 and are paying a coupon of 3.95 percent. That's equivalent to the yield on 10-year U.S. Treasuries back in 2007.

So you'd think perhaps investors would be wary about buying this stuff, right? After all, who knows what the world will be like in 40 years. Consider that 40 years ago, Microsoft was a year old. But investors aren't wary at all. They're fighting each other to buy these bonds. There was so much demand for Microsoft's bonds that the tech behemoth ended up paying a lower rate than it initially offered, and prices on the debt still rose after its initial sale, trading up almost 2 cents on the dollar in the three days after its issuance.

Price Surge
Microsoft's $2.25 billion of 40-year bonds have risen since they were first sold
Source: Trace, Bloomberg

The only loser here is the U.S. tax collector. Is it good that tax laws are encouraging these companies to leverage up their balance sheets rather than pay taxes? Probably not. But you can't blame the companies. Forget banks, tech companies are the modern financial innovators. From their perspective, and the perspective of the buyers of their bonds, it's a slam dunk.

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

  1. That is assuming the three companies paid the 35 percent corporate income tax rate on the collective $369 billion they hold in non-U.S. subsidiaries.  

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