Isn't that one of the things the banks did that lead to the 2008 collapse?
This can't end well...
Tech giants have discovered an ingenious way to borrow money – assume debts nearly paid for by the lenders. Apple is reported to have raised 1.25bn in Swiss francs ($1.19bn) from two bonds that will mature in 2024 and 2030 with rates of 0.25 and 0.7 per cent. That means Apple will pay back almost zero interest to the bond’s …
Apple has the cash pile as collateral. If and when it is required/chooses to pay it back, it can gladly do so. As for Microsoft, clearly the cash pile is not that big.
Loan/bond repayments are an expense. They get accounted for differently and show up in a different place in the regulatory paperwork.
By allowing companies to bring overseas cash back into the US at a lower tax rate (ostensibly to create jobs due to companies investing that money in the US) most of them now keep all their overseas cash overseas hoping that someday the tax holiday will return.
The only reason Apple is borrowing money is to allow them to buy back shares and increase dividends to investors, as the article says. If they used overseas cash they'd have to pay taxes on it, and it would cost them tens of billions they could otherwise save if there was another tax holiday in the future. So it is well worth the cost of the 1% interest on borrowed cash to keep that money overseas and let it pile up until a more business friendly administration takes over and institutes another tax holiday.
Hopefully this time they won't claim it is about creating jobs. It certainly didn't create any last time, though you could argue it might have created a few jobs for finance guys to work the details on these big bond issues. Probably not the type of jobs they were thinking of...
If you look up moral hazard in the dictionary, this is what they're talking about. Have one tax holiday, and companies will never bring back their cash at the full rate ever again!
"Isn't that one of the things the banks did that lead to the 2008 collapse?"
No. What they were doing is loaning out too large of loans to people, expecting payments said people could not make. They then divided up these loans into "mortgage backed securities", and invested improperly in these. They were FLAT OUT TOLD by the developer of these securities that 1% annual default rate over the course of 100 years DOES NOT MEAN 1% will default each year, it means almost 0 will default usually, then a few years out of those 100 years quite a few will default. Then they acted ALL SHOCKED when (after making money hand-over-fist for 5 or 10 years) the high default rate happened EXACTLY as they were told it would. Instead of letting them go out of business, various governments then bailed out these incompetent firms, and indeed they are now investing again in mortgage backed securities.
This is simply Microsoft and Apple (in effect) hedging that these interest rates are so low that they are below the rate of inflation. Since they already have cash to pay off these loans it's risk-free, and effectively they come out ahead.
As for those putting out loans at such low interest rates -- I do think this low a rate is rather unhealthy, but I think it's a symptom of poor economic health rather than a cause. This is a complicated matter to untangle though, particularly since economics is more a "whose opinions do you follow" than any sort of a hard science.
>As for those putting out loans at such low interest rates -- I do think this low a rate is rather unhealthy, but I think it's a symptom of poor economic health rather than a cause.
That, and the fact that if interest rates rose, a lot of governments (including the UK) would go instantly bankrupt, because they too have been borrowing heavily, but without any cash-pile for when (not "if") interest rates rise.
Such is the current insanity of #MyStupidGovernment that one sector of its two equally illogical political factions demands that US companies pay approximately 38% in taxes on foreign made profits. This is why so many US companies refuse to bring that profit into the USA and find ways to keep it out. One strategy for actually making that foreign cash available to these US companies is to sell debt for cheap prices. It seems like a scheme cooked up in an insane asylum, but it means companies like Apple and MS are paying out an interest rate on their bonds that is dramatically cheaper that the barrier tax imposed in the USA and get to use the foreign-made profit money as they choose.
Just don't ask me to explain beyond this superficial detail. Ask a CFO, CPA or investment banker.
What you are referring to is a tax that the corporations are legally and morally obliged to pay. This is no more a barrier than any other part of our legal or financial system.
It seems you have been bamboozled into believing the situation is more complex and ambiguous than it really is.
"What you are referring to is a tax that the corporations are legally and morally obliged to pay. "
No they're not. They only have to pay if they repatriate that money. If they spend it overseas somewhere and the money never comes back to the US, they don't have to pay.