Sales of corporate bonds are off by nearly a third on the year, no surprise in the midst of a severe credit crunch. But a big exception, according to a Bloomberg article, is
issuance by tech companies. Though they are having to pay up for the funds, tech companies are selling bonds at a record pace -- $22 billion worth so far this year, up from $15.1 billion for all of 2007.
The latest example is Hewlett-Packard Co., which on Tuesday raised $2 billion to help pay for its $13.2 billion purchase of Electronic Data Systems Corp. IBM Corp. sold $4 billion of bonds in October. And in November Microsoft Corp. made a regulatory filing that paved the way for its first-ever bond issue.
Why are they doing this? One reason is because they can. Since they tend to be much less leveraged than companies in other sectors, big tech firms are relatively attractive credits for investors. So even though current market conditions mean the money isn't cheap (HP is paying a spread of 4.6% over Treasuries), they're still able -- and eager -- to lock in funding during these uncertain times.
Of course, the reason why tech balance sheets have traditionally been more conservative is because of the greater business risks these companies face in their fast-changing sector. Maybe for these companies, though, the phrase should be "formerly faced." Maybe this is one more example of the way the current crisis is accelerating changes that were already in the works -- in this case, a recognition that big parts of the sector are maturing and consolidating.
As it happens, some perhaps related thoughts come from fixed-income strategist Bill Gross, managing director at Pimco. In his latest
investment outlook market commentary, Gross argues that stocks, while low, still aren't cheap considering the era now beginning. In his view we're entering a period of "lower leverage, higher taxes and a lack of entrepreneurial testosterone." In other words, a period when corporate bonds are better investments than corporate stocks.
OK, Gross is a bond guy. But remember the debate about Microsoft's huge cash hoard, before it announced a four-year, $75 billion plan in 2004 to
return funds to shareholders? Who knew that in September 2008 it would be announcing another $40 billion buyback, and that shortly thereafter it would be poised to become a bond company? -
Kenneth Klee
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