SAFT ON WEALTH: Rwanda, iBonds and the madness of the bond market
By James Saft
May 1 (Reuters) - In the past week we've had two object lessons in the madness of the bond market: Rwanda and Apple.
Apple Inc, maker of the ubiquitous iPhone and iPad, on Tuesday sold $17 billion of bonds, the largest-ever corporate issue, at rates of interest barely discernible with the naked eye.
Also recently, Rwanda issued a debut $400 million Eurobond in a sale that was heavily oversubscribed. As the market has taken to calling Apple's issue iBonds, you could easily call Rwanda's 10-year offering aidBonds, as foreign aid is one of the largest sources of government revenue for the tiny African country.
While Apple and Rwanda are at different ends of the risk spectrum, both deals neatly illustrate the headlong rush for anything investable and carrying something vaguely resembling an interest rate.
FRUIT OF THE TECHNOLOGY TREE
Apple's historic deal, its first since 1994, was priced closer to what a AAA borrower would pay, rather than a AA+ company with a dominant position in the turbulent tech sector. A $5.5 billion 10-year piece yields 2.45 percent, while three years gets you 0.511 percent, five years 1.076 percent and 30-years just 3.883 percent. Demand was stratospheric, with offers to subscribe totaling more than $50 billion.
For purposes of comparison, a 30-year U.S. Treasury bond yields 2.83 percent. The U.S. Treasury, while not possessed of the design savvy or cache of Apple, has access to something a lot more useful - a theoretically endless and costless supply of dollars the government can create to meet its obligations.
Apple, with more than $140 billion in cash on its balance sheet, was motivated to do the deal by tax concerns. Borrowing will allow Apple to buy back shares and pay dividends while limiting the tax hit it would take on repatriating cash held outside the United States.
The question with Apple, surely, isn't "Will you get your money back?" but instead, "Could you be paid better for the quite small risk that you won't get paid back?"
This is where that 30-year bond looks especially foolish for investors.
Remember BlackBerry? The communication device's fall from grace after Apple and other competitors entered the market is an object lesson in exactly how quickly the fortunes of tech companies can change.
Or look back 30 years ago to the Apple of that day. You could make a case that the Apple of 1983 was International Business Machines Corp, then a pillar of the stock market which had carried a AAA ratings since its first public debt issue in 1979. IBM is still a strong and vibrant company, but bond investors might remember that it was stripped of its AAA rating in 1992 and has been buffeted by competition and the ever-changing tech landscape.
Yes, there are major difference between the companies and no, Apple is not likely to go the way of BlackBerry. But if Apple suffers only a modest setback in one of its markets, its bonds might easily look woefully underpriced in a couple of years.
Rwanda's deal, which was also heavily over-subscribed, runs for 10 years and carries a 6.875 percent yield, as well as a junk-level debt rating of single B.
While Rwanda has been growing impressively in recent years - at about an 8 percent clip - this is a small, agrarian country with a history of civil strife and a massive dependence on external aid.
Not only does aid make up 38 percent of government spending, it accounts for 10 percent of GDP. Remember, this is a dollar bond and Rwanda cannot print dollars, but only earn, borrow or solicit them.
In fact, of the foreign currency flowing into Rwanda last year, 49 percent fell under the category of "current transfers," meaning it was mostly aid and remittances of Rwandans working abroad.
While one can only hope for success and prosperity for Rwanda, it seems to me that this is a very long and low-yielding deal with multiple potential points of failure.
So why are we here? Why are investors willing to bet that history won't repeat itself for Rwanda but will for Apple? In short, because central banks are creating conditions in which investors stretch for yield but cannot create the growth that will allow them to make decent long-term returns overall.
The main determinant of Apple's yield is Treasury yields, and those have been driven lower by central bank buying, which has also freed up private money that needs a home and still wants to hit its return benchmarks.
Likewise, Rwanda, which competes in a global marketplace without many high-yielding instruments and thus can lock up 10- year money at a very attractive price.
While risk management means that investors probably cannot abandon the bond market, even in its moment of madness, they should remember that 10 years is a long time in emerging markets, and 30 years an eternity in technology.
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