Why Are Cash-Flush Big Tech Firms Issuing Bonds?

Despite enormous cash stashes, three Big Tech companies have just issued a load of debt. At first blush, one wonders: why bother? They can easily cover buybacks, acquisitions and other needs with the cash.

In a sign of the times, the answer is that Amazon, Apple and Facebook-parent Meta Platforms are taking advantage of still relatively low interest rates. Meta, for instance, in its first bond offering ever, has an array of maturities ranging from 5 to 40 years.

The Corporate Finance 101 reason for taking on more debt, especially when it still is relatively cheap, is that it enhances a company’s capital and long-term growth prospects. And of course, interest on corporate debt is tax-deductible. None of the three companies responded to requests for comment.

Debt “drives up equity returns,” says Robert Cantwell, founder and portfolio manager at investment firm Upholdings. “You want more debt than cash.” Plus, every company finance chief “knows that you raise money when you don’t need it; it’s how you get the best terms.”

The 5-year obligation from Meta carries an interest rate of 0.75 percentage point over Treasury bonds. With the 10-year T-note at 3.0%, that implies 3.75%. This compares favorably with the average investment-grade corporate’s rate for that maturity, 3.95%, according to the Federal Reserve Bank of St. Louis’ count. The 10-year Meta bond is 1.75 points over that Treasury benchmark, at 4.75%. That’s just a little above the corporate average for that term, 4.62%.

These three companies are far from heavily levered. Amazon, which floated its first bonds in 1998, has cash and equivalents of $37.4 billion, with a healthy debt-to-assets ratio of 37%, per Bloomberg data. Apple’s cash on hand is even bigger, $48.2 billion, for a 36% debt ratio. The iPhone maker issued its first bonds in 2013. Meta, new to the bond market, sports $40.5 billion in cash, with a mere 6% debt ratio.

It helps that all three of these recent debt issuers have good credit ratings. Standard & Poor’s rating for Amazon is AA (three steps down from AAA, the top tier). Apple’s rating is AA+ and Meta’s is A-, likely due to its scant credit history. Moody’s Investors Service gives them comparable ratings.

Further, the interest rates they’re paying are much lower than inflation; the Consumer Price Index is now 8.5% annually. “And interest rates are going to rise,” observes Cantwell, due to the Federal Reserve’s campaign to choke off high inflation.

True, Meta has had some erosion of its Facebook user base and is spending a lot to expand into the multiverse. Yet it still generates ample revenue. The business performances of the debt-issuing trio are “pretty damn good,” says Cantwell.