http://dealbook.nytimes.com/2013/04/30/app...cord-debt-sale/We all know Apple. A great big, successful company which sells its stuff all over the world. Apple makes a lot of money: according to the linked article it generates $150 million dollars of cash every day. And it can't spend it. It has a whole lot of cash sitting in offshare tax havens - $102 billion, representing two thirds of its cash balance. So I was mystified to learn that it has borrowed $17 billion dollars this week. What is that all about?
The article says that Apple has issued bonds to raise that sum. That is what governments do. A bond is an IOU, and it pays interest to the person who buys that bond. It is also something which can be bought and sold. Interest rates are low at present and according to the article this can make sense for a company. Er...how?
Well according to the article Apple wants to pay shareholders a dividend of a total $100 billion dollars. Apparently its share price has fallen a lot -from $700 dollars last autumn to $400 dollars now. It seems that paying a dividend will help to reverse that; or so Apple thinks.
There are a number of puzzling things about that. In the first place, the US stock market (which trades in shares) is at a near record high. So why is Apple's share price falling? The article says there are worries about the company's future growth. That makes no sense to me. If people thought it was a good investment last autumn, what has changed that would justify a precipitate fall like that? It is perfectly possible that a huge company could decline over time and become less important and less profitable. But is there any reason to suppose that is going to be sudden? Perhaps the death of Steve Jobs is a factor because the article says that the company did not do so well when he was not in charge of it for a period in the past. Many people are great believers in "leadership" and consider that individuals are crucial to the performance of big corporations, and given that history it might account for a loss of optimism regarding Apple's future. But Jobs died in 2011, so the timing does not see quite right.
Second, if you have all that money and you think you need to pay a dividend, why not just do it? People often talk about government finance as if it was the same as household finance and that is an error, as we have often discussed. So what about big corporations? They are more like households, because they cannot issue their own currency, or so it appears on the surface. But if that is true, why take on debt if you can buy something for cash? Do you do that? There is much talk in the article about the low rate of interest the company will have to pay, as if that is a reason for deciding to borrow. That makes no sense to me at all, unless the interest earned on the cash I have is greater than the interest I pay on debt. Perhaps that is true for Apple. I do not know. But I cannot see why it should be true because banks do not pay out higher interest than they charge: and I cannot see why anyone else should. It may be that this is a consequence of putting the money offshore: perhaps foreign cash accounts are paying out more in interest than folk charge when they buy Apple's bonds. We know that can happen, because it is why people put their money into Icelandic banks and into Cypriot accounts: the interest paid was higher than they got at home. That ended well..... But even if that is true it makes no sense. If Apple gets higher interest on the cash they hold than they are going to pay out on the bonds then why don't the people who are to buy the bonds not put their money where Apple stashes theirs, instead? There is nothing to stop them doing that: that is the point of the absence of capital controls.
The third thing that puzzles me is this: like government bonds, these bonds pay different interest rates depending on how long it is till maturity (the date when the money is repaid). So Apple issued 6 different kinds of bonds ranging from one which matures in 3 years and pays 0.45% interest, to one which matures in 30 years and pays 3.85%. Why would anyone buy these? I could get a 2 year savings account in my building society which pays 1.68% net. As to the longer term? Why would anyone buy a bond which pays 3.85% for 30 years? Who can predict what interest rates are likely to be in that kind of time frame? It is obvious that whatever people are doing they are not buying these things because of the interest rates they pay.
The difference between these things and my building society account is this: I can't sell my savings account. It is reasonable to conclude that this difference is the one that makes a difference, for the purchasers. And that is somewhat confirmed in the article. So it seems to me that purchasers are not making any commitment to the company, as shareholders are supposed to do (but don't, in practice); it is just more casino money sloshing around. But it still puzzles me a bit, because I don't see where the gain is to come from, on the face of it. The article implies that the price of these bonds is determined by the interest rate, and that is what happens with government bonds, though not directly. Obviously if the rate of interest the bond pays is low compared to other products on the market the price will fall: and if it is high it will rise. Say I bought 100 3 year bonds at $5 each, and they pay me 0.5% per year. I have spent $500 and I will get $2.50 a year in interest. At the end of the three years I get my $500 back: so my money is now $507.50. If I can't get a better rate of return anywhere else that is fine. But if, in year 2, interest rates on comparable bonds rise to 1% I am not going to be happy. In years 2 and 3, if my $500 were in some other bonds, I would get $5 instead of the $2.5 I am locked into. So I will want out. Nobody is going to buy my bonds for $500, for the same reasons I want to sell. But they will buy them for $250 because then the interest they get (fixed at $2.50) is the same as everyone else is getting ie 1%. I am not going to sell at that price though, because I lose far more than I gain.
to be continued
