Apple Inc. sold $17 billion worth of bonds Tuesday, in one of the hottest corporate debt offerings in history. The deal is a clever maneuver of corporate finance that will likely prove beneficial for Apple shareholders—but in ways that show what’s wrong with U.S. tax policy and why the Fed’s easy money policies haven’t done more to rev up the economy.
First, the why: Apple is sitting on a vast hoard of cash and easy-to-sell securities--$145 billion, to be precise. Seeing limited opportunities to profitably invest that money, it has decided to return a bunch of it to shareholders: $100 billion between now and the end of 2015.
Should be simple, right? Just sell off the securities on the company’s books and carry out the share buybacks and dividend payments that are scheduled. The problem is that much of the companies cash hoard is overseas, retained earnings from its various international operations. And if Apple brings the money back into the United States in order to return to shareholders, it will face a big honking corporate income tax bill of up to 35 percent.
So if you’re Apple, you are hoping one of two things will happen: Your first choice is to bide your time and hope that Congress enacts another tax repatriation holiday like one that took place in 2005, in which you have a one-time opportunity to bring overseas profits back to the United States at a deeply discounted tax rate (it was 5.25 percent in 2005). Even if that doesn’t happen (and the Obama administration is likely to oppose to any such efforts), Apple could face lower tax bills for repatriating the money in the future if there were some overarching corporate tax reform that lowered rates while eliminating deductions.
So if there’s a way to return money to shareholders while holding off repatriating cash from abroad, Apple has every reason to do it. That’s where Ben Bernanke comes in.
The Fed’s $2.2 trillion and counting of purchases of Treasury and mortgage-backed bonds are pushing private money into other segments of the debt markets. And corporate debt has been one of the biggest beneficiaries. Those investors whom the Fed is squeezing out of the market for Treasury bonds are buying high-rated corporate bonds instead, and that’s actually by design; Fed folks call that the “portfolio balance channel” through which quantitative easing boosts asset prices and, in theory, the economy.
It is amazing how cheaply Apple is able to borrow money. Its 10-year bonds issued this week yielded 2.415 percent at a time 10-year U.S. Treasury yielded 1.61 percent. Apple 30-year bonds yielded 3.883 percent, while 30-year Treasuries were at 2.811 percent.
Investors are willing to lend Apple money for three decades for only about a percentage point more in interest than if they lent the same money to the U.S. government.
This seems like insanity. Thirty years is an eternity in the computer business. This time 30 years ago, Apple had not yet introduced the Macintosh computer; anyone who pretends to know what the computer business will look like 30 years from now, and whether Apple will have any role in it, is unhinged. Whereas buyers of Apple stock at least get a claim on profits from whatever brilliant products Apple comes up with in the future, owners of their debt have no upside—only the downside that can come if the company were to default. The U.S. government, meanwhile, has a two-century history of solvency, its own central bank capable of creating money from thin air, and the most powerful military force the world has known. (I will grant, however, that Apple’s management team has a better track record over the last few years than that of the U.S. Congress, and that its balance sheet looks a good deal bigger).
This phenomenon shows in practice why the Fed’s quantitative easing policies have had less impact on the economy than one might hope. They have succeeded at the first part of their job, of pushing borrowing costs for Corporate America down.
But for the economy to take off, businesses need to take advantage of those low rates to invest—to invent new products, build new factories, hire new workers. Instead, what Apple is doing is all too typical. It is taking advantage of low rates to funnel money to shareholders in a bit of financial engineering, rather than triggering new investment. And as such, it is a powerful reminder of the limited ability of the Fed’s bond buying to create rip-roaring growth.