Re:Facebook Profit Jumps 71% Year-over-Year
by ingenuous2 on Wednesday July 26, 2017 @10:27PM
(#14862222)
I am naive in this area, but if the creditors freak out, what does that mean? Seems like a "freak out" would mean higher interest rates, and when those rates cross the return from the cash stockpile, they just would stay paying down the debt more aggressively?
Sure; it's just that we're talking about spending the cash stockpile. Microsoft has $126b "in the bank" but that doesn't mean they could actually spend all $126b on some moonshot, because by the time they'd spent half of it it would affect their interest rates and they'd have to start doing something about their debt.
Despite the immense profitability the companies have, their debt holders will get freaked out if those large cash piles were to get discharged down toward zero. For example, Berkshire Hathaway got slapped for allowing its cash to drop a bit low (relatively speaking) a number of years ago (also coincided with the worst of the great recession), their credit rating got dropped a notch in part because of it (despite it being very unrealistic they were actually more risky just because cash was briefly at $30 billion versus $50 billion). You'll often see the ratings agencies & analysts talk about wanting to see Berkshire maintain a large amount of cash due to its obligations.
Apple and Microsoft are paying very, very low interest rates on their debt. Given the scale of those debt piles now, they'll desperately want to maintain those low rates. Maintaining a sizable pile of cash will assist them in doing so.