There's a new whale in the corporate-bond market.
Apple Inc., Oracle Corp. and the other tech giants hoarding half a trillion dollars in cash have joined the ranks of the biggest buyers of the debt, often snapping up as much as half of some bond issues, according to five people with knowledge of the transactions.
The companies are muscling into a market traditionally dominated by big bond funds including Pacific Investment Management Co., BlackRock Inc., Vanguard Group Inc. and Fidelity Investments. They're homing in on one of asset managers' favorite ways to juice returns, particularly as the Federal Reserve holds short-term interest rates near zero for a seventh year.
All four of Australia's biggest banks, heavily reliant on offshore debt markets, have sent representatives to Reno, Nevada, where Apple's money-management unit, Braeburn Capital Inc., is based, according to people with knowledge of the trips. Oracle's cash managers are also based in the city known for its casinos, where hotel rooms costing as little as $69 a night provide cheaper lodgings than banker stops in New York, Boston and Newport Beach, California, where Pimco is based.
Piles of Cash
Corporate treasurers looking to invest record amounts of cash have increasingly turned to debt markets in recent years as yields evaporated on safer investments such as U.S. Treasuries. No industry has amassed bigger piles of cash than tech.
Apple, Oracle, Google Inc. and seven of their biggest peers now have in excess of $500 billion of cash and marketable securities, up more than three-fold since 2008, according to data compiled by Bloomberg. The problem is much of it is stuck overseas. Bringing it home would mean subjecting it to U.S. repatriation taxes, so they invest it in the bond market.
Apple, run by Tim Cook and based in Cupertino, California, had $171.3 billion of its cash and marketable securities in foreign subsidiaries and "generally based in U.S. dollar-denominated holdings" as of March 28, according to a regulatory filing.
The trend is cutting into traditional investors' access to new issues.
Juicing Returns
Getting allocations of corporate bond deals is one of the easiest ways for managers to outperform benchmark bond indexes because they're typically sold at a discount to market rates, according to Jason Shoup, the head of U.S. high-grade credit strategy at Citigroup Inc. The bonds aren't added to the indexes investors are measured against until the end of each month. That can generate as much as 0.2 percentage point of additional gains for investors who get in early, Shoup said.
Apple, which had $193.5 billion of cash and marketable securities as of March 28, is now one of the biggest buyers of shorter-term debt sold by investment grade companies, often taking as much as $200 million of a $1 billion issue, according to four people with knowledge of the deals.
"I am sure asset managers like Vanguard and Pimco would prefer Apple call them and have them manage the money rather than competing with them," said Kevin McPartland, the head of research for market structure and technology at research firm Greenwich Associates in Stamford, Connecticut.
Exxon, Merck
