RICH TECH FIRMS GO ON BORROWING BINGE

Leap in long- term debt — up 42% in one year— is a dramatic change for the industry

There’s a new worry for tech investors during the ongoing profit reporting season: tech companies’ fast- growing addiction to debt.

Tech companies in the Standard & Poor’s 500 index are now on the hook for $ 451.4 billion in long- term debt, up 42% from just a year ago, according to a USA TODAY analysis of data from S& P Global Market Intelligence based on second- quarter levels, excluding financials. That’s the largest borrowing jump among the 10 sectors analyzed and large enough that it could shift the way investors perceive the sector.

Such aggressive borrowing is a dramatic change for the industry where debt for decades was a dirty word. Even today, Microsoft is one of just two U. S. companies that still have perfect AAA debt ratings due to its low level of borrowing relative to cash flow and is a personification of tech’s aversion to debt. Facebook has no long- term debt.

But that’s changing fast. Apple came into the third quarter owing $ 68.9 billion, more than any other tech company and up 45% from the prior year. Video game maker Electronic Arts, which had no long- term debt a year ago, now owes just shy of $ 1 billion. Just this week, video streamer Netflix sold $ 1 billion in debt, a sizable sum that adds to the company’s existing $ 2.4 billion pile of longterm debt.

“They ( Netflix) are spending a lot of money, and they’re using debt instead of equity,” says Neil

Begley, analyst at debt- rating service Moody’s Investors. “They used cash flow before as a governor of growth. Now they’re borrowing to launch.”

There are a number of trends behind tech’s growing addiction to debt including:

Rise of stable subscription models. Software companies are embracing a new model where they charge subscriptions monthly or annually, rather than making big upfront sales. ( Think Netflix.) That makes cash flow more stable, almost utility- like, says Mark Marcon, analyst at Robert W. Baird. Greater stability gives tech companies more confidence to borrow.

Avoidance of U. S. taxes. Avoiding U. S. taxes is a big driver. Much of these tech companies’ profits and cash are stored overseas. By borrowing in the U. S., tech companies have cash to pay dividends and buy back stock without triggering a tax event by bringing the cash home. Technology companies, including Microsoft, Apple and International Business Machines ( IBM), account for 53% of cash parked overseas, says research by David Zion at Credit Suisse.

Low debt costs. Rock- bottom borrowing costs makes leverage affordable and difficult for even tech companies to ignore, Marcon says. Not just tech is partaking. All 10 non- financial S& P 500 sectors boosted long- term debt in the second quarter from the same period last year. Debt among all companies has risen every year since 2009 to hit $ 6.6 trillion last year, S& P Global says.

Piles of cash. Tech companies can borrow because the sector is rich. S& P 500 technology companies ended the second quarter with $ 610.1 billion in cash and short- term investments, which is more than that of the next three richest sectors combined. S& P 500 tech companies’ earnings are expected to rise 6% in the third quarter, S& P Global says, making them a rare pocket of robust growth.

But that’s still a slowdown from recent years, so many tech companies are using debt to buy companies that are growing faster, says John Moore, analyst at S& P Global.

Tech companies account for 20% of buyouts this year.