NEW YORK, May 20 (IFR) - The pressure is on Apple and Amazon to consider the merits of issuing bonds for the first time in their corporate lives, especially now that Google has demonstrated how low investors will go on yield to get a rare slice of large-cap tech company debt.
More than $9bn of orders flooded underwriters of the $3bn of three, five and 10-year notes Google offered earlier this week, which priced with coupons of just 1.25%, 2.125% and 3.625%.
Although the proceeds were officially used to pay off commercial paper, many believe Google has issued now so it has the lowest possible pricing points for bond deals in the future.
“It sets the stage for some future debt issuance, and we have incorporated the prospect of (Google) the company bringing more debt into its capital structure,” said Richard Lane, senior technology company analyst at Moody’s Investors Service.
“As of today, Google could double its debt and keep its Aa2 rating,” Lane added.
The big technology companies started life conservatively, preferring to avoid debt and use the enormous amount of free cash flow that their businesses throw off every year to grow their businesses.
Corporate financing issues change, however, as a company grows in size.
“As many mega-cap companies mature, the top line often gets so large that it’s hard to move the needle from a growth perspective with just organic growth,” said Bryan Jennings, head of fixed income capital markets at Morgan Stanley.
“Often times the only way to create meaningful growth is by making a large strategic acquisition. If you want to fund that with debt, then now is an opportune time to establish a yield curve at historically low rates.”
So far most of the large tech companies have issued bonds - Amazon and Apple are the last holdouts in the mega-cap milieu.
“Many tech companies have looked to raise capital in the USD market over the past year, for a multiple of reasons, including acquisitions, the maturing of businesses and the inability to tap offshore cash without tax consequences,” said Keith Harman, a managing director in debt capital markets at Bank of America Merrill Lynch.
Google’s move is more like the dry powder argument: Do it now rather than wait to issue in the future, when rates could be a lot higher. It’s possible that Apple and Amazon could think the same.
“I think Apple and Amazon are watching all this. I know they are watching all of this carefully,” said one technology investment banker.
Apple’s a special case, with a mind-boggling $60bn of cash and short-term investments on its balance sheet.
“It has a different kind of management. They have all this cash and they don’t have the offshore trapped cash problem that a lot of other tech companies have, so it’s hard to say whether they’ll want to issue debt in the future,” added another banker in the debt capital markets who focuses on technology companies.
Amazon is a more likely prospect, say some.
“They are one that certainly could issue debt,” said one investment banker. “They have been on my list as a potential borrower for a long time and it’s possible. Remember that it was only a few years ago that people didn’t think Microsoft would come to the market.”
As tech companies like Google mature, they’re being introduced to capital structure optimization strategies, which large-cap companies in other sectors use to increase their return on equity.
“Many of the large-cap tech companies have decided that having debt on the balance sheet is an appropriate method of optimizing your capital structure, which is relatively new to them,” said David Trahan, head of investment grade syndicate at Citigroup, which was active bookrunner on the Google deal with Goldman Sachs and JP Morgan. Bank of America Merrill Lynch, Morgan Stanley and Credit Suisse were passive bookrunners.
Given that debt is a cheaper form of capital than equity, having debt on the balance sheet helps a company lower its weighted average cost of capital for an investment and therefore increases the return on equity.
“Having an optimal capital structure driving your return on equity is a successful strategy that a lot of corporates employ, so we are seeing some tech companies take advantage of that strategy at a time when we have historically low rates,” said a debt capital markets banker focusing on technology companies.
Danielle Robinson is a senior IFR analyst; Tel: 1-646-223-6141