WHY FED IS POLISHING UP APPLE
Some of America’s most successful companies are to benefit from push to inject liquidity, writes
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