Some of Amer­ica’s most suc­cess­ful com­pa­nies are to ben­e­fit from push to in­ject liq­uid­ity, writes

The Daily Telegraph - Business - - Front Page - Tim Wal­lace

Share­hold­ers in Ap­ple have not had a bad pan­demic. Less than two years ago Amer­ica’s tech­nol­ogy gi­ants were en­gaged in a race to be the first to hit a mar­ket val­u­a­tion of $1 tril­lion (£800bn). The iPhone-maker won that bat­tle. Now it is worth more than $1.5 tril­lion, with tech com­pa­nies ben­e­fi­cia­ries of shifts to re­mote work­ing and con­tact­less com­merce.

De­spite this ex­tra­or­di­nary boom, Ap­ple is high up on the list of busi­nesses whose bonds will be bought by the Fed­eral Re­serve.

It is hardly as if the ti­tans of tech re­quire bailouts.

Yet it is a mark of the Fed’s ef­forts to crush in­ter­est rates, in­ject liq­uid­ity and boost mar­kets that the big­gest busi­nesses in the US are go­ing to ben­e­fit di­rectly.

Un­der its Sec­ondary Mar­ket Cor­po­rate Credit Fa­cil­ity, the Fed is buy­ing in­di­vid­ual bonds and ex­change-traded funds cov­er­ing al­most 800 com­pa­nies with in­vest­ment-grade debt.

El­i­gi­ble com­pa­nies in­clude Volk­swa­gen, Ford, IBM, Wal­mart and BP’s US fi­nanc­ing arm.

Un­der the SMCCF, and a later pri­mary mar­ket scheme which buys di­rectly from the com­pa­nies rather than debt which is al­ready in in­vestors’ hands, the Fed will buy up to $750bn of notes.

“The avail­abil­ity of credit has con­tracted for cor­po­ra­tions and other is­suers of debt while, at the same time, the dis­rup­tions to eco­nomic ac­tiv­ity have height­ened the need for com­pa­nies to ob­tain fi­nanc­ing,” the Fed said.

“Th­ese dis­rup­tions have been felt by even highly rated com­pa­nies that need liq­uid­ity in or­der to pay off ma­tur­ing debt and sus­tain them­selves un­til eco­nomic con­di­tions nor­malise.”

Buy­ing th­ese bonds pushes down in­ter­est rates in the mar­ket, mak­ing it cheaper for busi­nesses to bor­row. It gives in­vestors con­fi­dence they can sell on any bonds they have bought. And it im­me­di­ately gives them more cash to rein­vest, stim­u­lat­ing more lend­ing.

It is an ex­tra­or­di­nary scheme for ex­tra­or­di­nary times, and comes along­side pro­grammes to lend to lo­cal gov­ern­ments and even high street busi­nesses

– ini­tia­tives far in ex­cess of any­thing at­tempted in the fi­nan­cial cri­sis, and re­flect­ing the lack of space to use con­ven­tional in­ter­est rate cuts to get the job done.

But when it comes to buy­ing big com­pa­nies’ bonds, the Fed is not alone.

The Bank of

Eng­land lists in­ter­na­tional gi­ants in­clud­ing Ap­ple,

Élec­tric­ité de France and Siemens as com­pa­nies whose bonds are el­i­gi­ble for pur­chase un­der its own scheme. Its Covid Cor­po­rate Fi­nanc­ing

Fa­cil­ity has also at­tracted big in­ter­na­tional names.

It says it wants to sup­port all cred­it­wor­thy busi­nesses with sig­nif­i­cant UK oper­a­tions. The goal is to strengthen the econ­omy as a whole, rather than dis­tort­ing it by favour­ing do­mes­tic firms or those in any par­tic­u­lar in­dus­try.

Ul­ti­mately the Fed’s scheme will be far big­ger than the Bank of Eng­land’s – the lat­est ef­fort from Thread­nee­dle Street to­tals £10bn – as the US has a larger econ­omy with a vastly greater bond mar­ket. Big pur­chases so far in­clude bonds of AT&T, Coca-Cola and Berk­shire Hath­away En­ergy.

Sim­ply an­nounc­ing the scheme seems to have had a big ef­fect, pulling down bor­row­ing costs. As Gold­man Sachs notes, “the mere pres­ence of the back­stops helped to re­store the flow of pri­vate credit”.

So far, so good. How­ever, the in­ter­ven­tion of cen­tral banks into th­ese mar­kets stirs con­tro­versy. The usual re­sponse from pro­po­nents is that if some­thing helps the econ­omy back on its feet, then it will help the lit­tle guy as well as the big bosses.

An ex­tra quirk in the sys­tem comes when one asks why some of th­ese busi­nesses are bor­row­ing at all, and hence have is­sued the bonds which the Fed is now buy­ing.

It seems odd when Ap­ple, for in­stance, fa­mously has a moun­tain of cash in the re­gion of $200bn.

Yet bor­row­ing can still make sense when low rates make it al­most free.

An­other key is that th­ese are global busi­nesses.

Much of Ap­ple’s cash is out­side the US. As the busi­ness noted in 2012, “repa­tri­at­ing the cash from off­shore would re­sult in sig­nif­i­cant tax con­se­quences un­der cur­rent US law”.

Bring­ing money home typ­i­cally re­sults in a tax charge of 35pc – de­spite lob­by­ing ef­forts by cor­po­rate Amer­ica – so it is bet­ter to bor­row at min­i­mal in­ter­est rates than hand tens of bil­lions of dol­lars to the tax­man.

In this cir­cum­stance it means that the Fed could be sup­port­ing com­pa­nies by buy­ing bonds that were is­sued in part to save money on tax bills – a cu­ri­ous cy­cle of ac­tion as dif­fer­ent arms of the state op­er­ate in dif­fer­ent ways and with very dif­fer­ent goals.

‘The mere pres­ence of the back­stops helped to re­store the flow of pri­vate credit’

Bond-buy­ing bailout: Jerome Pow­ell, the Fed­eral Re­serve Board chair­man

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