Big tech targets bond market for cash to buy back sinking stocks

Tech companies including Microsoft Corp and Meta Platforms are expected to hit the bond market in size to buy back stock after last year’s rout.

As much as $20bn in issuance from Microsoft and $10bn from Meta could be on the docket, according to analysis by Bloomberg Intelligence. The sector has more cash than others, giving it room to pursue bond sales to fund buybacks.

Microsoft’s shares are down nearly 30 per cent in the last year, while Meta Platforms saw more than 60 per cent of its value erased.

The massive sell-off in many high-flying tech stocks may push the industry’s behemoths to borrow more to help return money to shareholders as cash levels drop.

“Despite rising interest rates and minimal maturities, we don’t expect tech to avoid debt markets; the sector may continue to bolster balance sheets, particularly for enhanced shareholder returns,” Bloomberg Intelligence strategist Robert Schiffman wrote in a note on Wednesday. Funding for acquisitions and maturing debt also “could drive jumbo financing at the sector’s largest issuers.”

Amazon.com, meanwhile, shored up $8bn through a term loan just as the company announced it is laying off more than 18,000 workers. Its shares have plunged almost 50 per cent in the past year.

A spokesperson for Amazon said the company regularly evaluates its operating plan and makes financing decisions – like entering into term loan agreements or issuing bonds – accordingly. “Given the uncertain macroeconomic environment, over the last few months we have used different financing options to support capital expenditures, debt repayments, acquisitions, and working capital needs,” the spokesperson said.

Microsoft and Meta did not immediately respond to requests for comment.

Less leverage

Most companies in the high-grade market spent the past decade binging on debt and pushing ratings down to the last rung of investment grade. Now, as an economic downturn looms, the average blue-chip company is expected to be in balance sheet repair mode, according to Bank of America strategist Yuri Seliger.

“Investors want companies to be more careful with their balance sheets and use cash to pay back debt,” he said. “The tech sector might be an exception because that industry has a lot of cash.”

Travis King, head of US investment grade corporates at Voya Investment Management, is upbeat on higher-quality tech names. But he remains cautious about companies in the sector with BBB ratings, the lowest tier of investment grade.

“We want to stay up in quality to start the year and most single A tech names have very strong balance sheets with net cash positions in many cases,” he said. “While the equities have been hit, the credit profiles are still very strong.”

But the industry’s robust cash levels have fallen. Microsoft’s cash levels dropped 22 per cent since its September 2020 peak, according to Schiffman. Meta and Amazon’s cash piles plunged 34 per cent and 39 per cent from their June and December 2021 peaks, respectively.

And while big tech’s balance sheets are still in a strong position, it is likely that cash levels will deteriorate further without additional borrowing, Schiffman added.

“Cash on balance sheets remains abundant,” he said. “But it would likely fall sharply if not for opportunistic borrowing in 2023.”

Elsewhere in credit markets…

Americas: The one company that was contemplating selling investment-grade bonds Friday stood down after a strong employment report saw treasury yields fall. An extremely hot start to the year that saw 32 deals in the first two days quieted with just three deals priced Thursday, giving the market a little time to digest the barrage of new supply.

* The structure of a Bed Bath & Beyond bankruptcy likely to hit in the coming weeks will revolve mainly around the fate of its prized Buybuy Baby brand, which comprises much of the company’s value.
* Small and mid-sized companies could find it harder to get debt financing soon, as both collateralised loan obligations and banks have pulled away from lending to them, according to Arlene Shaw, managing director and treasurer at Brightwood Capital.
* SOFR futures and options volumes were 28 per cent and 82 per cent above 20-day average levels Thursday. Options flows were dominated by new put condor structures targeting a Fed policy rate higher than is currently priced into Fed swaps, CME preliminary open-interest data suggest.

EMEA: The Epiphany holiday has brought Europe’s primary market activity to a halt on Friday — the first zero sales day of the new year. Issuance had reached EUR77.4bn — that’s the highest first-week volume since at least 2014, according to data compiled and analysed by Bloomberg.

* Sales of new bonds in Europe are steaming ahead of last year and that’s even before corporates have yet to flood the market with new deals.
* From Credit Suisse to Barclays and BNP Paribas, banks have helped push new bond supply in the first week of the year to over EUR77bn — or 75 per cent above the same point in 2022.
* The first week of 2023 is also turning out to be the second-best start to a year on record for euro high-grade total returns, as cooler-than-expected inflation prints spurred a rally in government bonds.
* Junk bond premiums in Europe are narrowing the gap with their US peers as a mild winter means the region’s economy looks set to avoid a worst-case scenario.

Asia: Sales of dollar bonds in Asia outside Japan totaled $12.6bn, according to Bloomberg-compiled data. That’s the highest weekly tally since September 2021.

* Asia Pacific issuers paid more than double on average to price US-currency debt in their record sales blitz this week, compared with a year ago, after the Fed’s most aggressive hiking cycle since the 1980s.
* Cerberus Capital Management’s planned purchase of Apollo Global Management’s asset reconstruction company in India has stalled, according to people familiar with the matter
* China is planning to relax restrictions on developer borrowing, dialing back the stringent “three red lines” policy that exacerbated one of the biggest real estate meltdowns in the country’s history.
* UBS Group AG upgraded onshore convertible bonds and offshore-listed Chinese equities to “most preferred” as they are the main vehicles to position for a sooner-than-expected full reopening in China.

Read: Apple stock loses shine as market value drops below $2tn