This past year alone has seen a range of about 13% for USD/EUR. A shift like that would wipe out any interest related savings.
If the interest rate in EUR is 2% and the interest rate in USD is 4% and the cost to maintain a EUR/USD hedge is less than 2% then you can make free risk-free money by borrowing EUR at 2%, exchanging it to USD, and lending it out at 4%.
Such a situation is unstable as more and more capital would pour in to take advantage of it and the cost to hedge would rise or the interest rates would move closer together until the gap disappeared.
It looks like the deal is 16bn across 7 tranches. EUR equivalent would be much harder for the market to digest and a lot more difficult to hedge.
Futures
or plain old fx swaps solve all of these problems
According to the US government there is currently 57 billion EUR in open futures contracts, which is currently 68 billion USD. A new market participant that needs 23% of this current level of liquidity should be able to attract the interest they need without moving the market.
http://www.cftc.gov/dea/futures/financial_lf.htm
Qualified participants are able to negotiate non-standard sized futures contracts, and wouldn't have to worry about broker commissions.
In the futures, the rolling transactions would have to be maintained.
IDK technically it should be near free, but the other banks are pretty greedy so hard to say. Really shouldn't cut into the free-ness of the yield and bond issuance.
I'm not trying to be rude but I don't think you know what you are talking about if you are suggesting that executing a futures transaction that large won't move the market and that rolling USD 16bn equivalent futures is going to somehow come out near free. Amazon merely announcing an EUR deal that large is going to move the market and that's not even considering actually executing these theoretical trades. You don't want to give people the ability to frontrun you on something that large.
Suggesting non-standard sized future contracts completely negates the liquidity argument and also leaves you at the mercy of either your counterparty or someone else who likely has the ability to move the market in order to screw you over.
I'm pretty sure Amazon along with other issuers who issued multi-billion USD deals this year took a look at issuing in EUR and decided it wasn't in their best interests.
Okay.
> ... liquidity
Liquidity begets liquidity. Do what you can.
> I'm pretty sure Amazon along with other issuers who issued multi-billion USD deals this year took a look at issuing in EUR and decided it wasn't in their best interests.
You shouldn't make that assumption. There are many market participants that wouldn't consider the world outside of their market. There was a long time where the US was the only liquid market, and still eclipses the single currency bloc for liquidity. When favorable inefficiencies come up it is easy to miss them.
The cost of the transaction should be a factor, but the foreseeable costs are not that big of a factor. The company can issue 10 - 40 year bonds (or whatever else the market can bear) at low, zero, or negative interest rates and not have to worry about it until 10 - 40 years later. And then what? Well they just issue more bonds, in the next low interest rate environment and use a lot of the proceeds to pay off the remaining bit.
Microsoft issued bonds[1] to fund the acquisition of LinkedIn even though MS had plenty of cash in the bank to buy it outright. (Not sure how much of $100+ billion is in USA vs overseas which may have made the $26 billion cash payment for LinkedIn a stretch.) Alternatively, Microsoft could have paid via stock -- but they didn't. (Or maybe Reid Hoffman negotiations said "no" to MS stock.) In today's climate of low yields, healthy companies can buy companies without stock or cash holdings. Just issue bonds.
Facebook bought Instagram and Whatsapp with stock so the calculus was different there.
[1] http://www.investopedia.com/news/microsoft-leads-aaa-bond-sa...
If they had $16B lying around in cash, yes that question would probably make sense. You also have to take into account where that money is, since you can't bring overseas money within the US without paying a tax.
> If your investments make a better return than you'd pay interest on debt, it makes sense to take out a loan
Which doesn't quite add up!
Yes, you're making money, but you're making less than you could have without the loan.
In the original example there was an investment that returned 7%, and a loan was available for 3%. You can choose to invest your own money (let's assume it's $100,000), or to take a loan. If you take the loan you're making $4000 a year (4%) from the investment, and if you didn't take the loan you'd be making $7000 a year (7%). You're worse off!
But you have still have your original $100k, so you can now go and invest that. Say you find another opportunity that returns 4%, and invest your money there. You're now making $8000 a year ($4k from the investment with the loan, and $4k from this new opportunity) You're better off!
But what if you can only find other opportunities that return 2%? If you were to invest your money there you'd be making $6000 a year, so you'd still be $1000 a year worse off for taking the loan!
My point is that it doesn't always make sense to take the loan. There's a trade off - you're taking worse returns in exchange for having additional capital available to you. If you can invest that capital in something that returns more than the delta between what the original returns would have been and the interest on the loan only then does it make sense. If you can't get better returns that the delta you'd be worse off - at least in terms of returns, perhaps that's something you're ok with to have additional capital available.
If you can get 90 days at no interest, for example, you might as well take it and get 90 days of growth on your investments.
When I sold my company, the financial agency with whom I worked gave me free services with a financial advisor - not the same as a financial manager. It took me a few minutes to get it, but you probably still want to finance a house - even if you can pay cash.
Your cash, when invested, can earn more than you're spending to service the loan, in some situations,
The "average" is a sideshow when there is so much opportunity if you know where to look.
I'm not sure how Eurozone debt came up. I didn't read anything about Amazon and Eurozone issuance in the article, did I miss it? Though, technically Amazon did issue an unregistered private placement of debt in this case, so the debt was not eligible to be sold in the US or sold to US persons unless exempt of course [4].
As for the claim that investment grade corporate issues can get 0% in the EU or that junk bonds have lower yields than treasuries, or any sort of ideas like that where it is "cheaper" to borrow in Europe because spot rates are printing lower (and negative) there - that's a miscalculation and debt markets doesn't work like that. First, at a basic theoretical level there is a concept of interest rate parity which is maybe worth reading about but not really super important after freshman year of college [5].
I could not find a public non-paywall link with current EURUSD basis swap rates (basis swaps would help show the adjusted rates foreign borrowers pay) but the following links from the ECB show how much they are sucking right now suffering from low GDP and low inflation (remember debt that one borrows is paid back with future money that has inflated (and sometimes deflated) so if inflation is relatively high between the time money is borrowed and paid back that is good for the borrower) [6] [7]. According to this link option adjusted spreads on EU high yield are around 275 basis points not lower than treasuries, that is +275, as of right now [8].
While off the subject for a sec, it appears currency FX risk hedging also came up in this thread, with some people talking about hedging currency FX on a company's non-USD denominated debt being a good thing and/or inexpensive and/or easy for a company to do. IMHO that is a misleading interpretation of what corporate currency FX hedging is. A company "hedging" a financial risk like a currency depreciation going against them does not elimate risk nor lock in some sweet profits like people seem to think hedging accomplishes. What happens is future currency moves can lead to uncertain GAINS OR LOSSES for a company, but nobody knows which way it will go. So company management can choose to reduce their potential gains and potential losses from currency FX in the NEAR future in exchange for taking a certain definite loss right now. A company can only do this for the near future, 3-24 months or so, on a rolling basis if they choose. (Amazon issued for 40 year bonds, there is no such thing as 40 year currency hedging forwards, nothing is locked over this time, a lot can happen).
It's important to note a company will have paid money to eliminate downside and eliminate upside. The company has also added a new risk, the risk from the hedge project itself, as currency hedging doesn't always work as expected. Investment banks make mistakes (Citi and UBS are notably error prone, GS may or may not screw up on purpose) or central banks and gov regulators do weird things a FX hedge didn't factor in when started (Za Sviss). The list goes on.
I'm not anti corporate FX hedging, I see companies using currency hedging in the right way and to their advantage every day. I just was hoping to clarify that hedging is not an elimination of risk for a small cost. It's the reduction of potential profit and loss in exchange for a certain loss, this loss can be expensive and the process can go wrong making things worse.
Q: Is a certain relatively small cost every month better for a company than an uncertain gain or uncertain loss every month?
I would say sometimes. Depends on the company and the context.
One thing we do know is Amazon has foreign currency risk and Amazon has chosen NOT to hedge it or at least not hedge a huge chunk of it. Their latest SEC filing reports a loss of at least -$450 million due to foreign currency changes going against them.
Ok, sorry for the long post, bathroom break over, I just want to add one thing: companies cannot just borrow as much as they want for no reason just because rates are low. Many companies with low or no debt are not borrowing because they have no f'ing clue what to do with the money if they did take on debt. Companies need to do something with borrowed money AND they need to tell lenders more or less what that something is. (Amazon said clearly in their filing they want to borrow this money to buy a chain of overpriced health food stores, Apple has tons of cash saved up but Apple has made clear they are issuing debt anyway so Carl Icahn will shut up).
If a company can't think up a worthwhile making or selling of something new to invest their capital into (a problem many companies today are suffering from) company existing debt doesn't have to just sit in the bank earning nothing. The company can pay back loans early, or this money can be re-invested into other bonds! Yes, Debt on debt. Though these bonds a company's corporate cash invests in are going to be better-rated more-boring bonds lower yielding than their own (often just treasuries and short term other quasi's). Thus this limited corporate cash investing universe all but eliminates a scheme where it would be worthwhile for a company to borrow cheap debt and then try to earn a spread by reinvesting that $ into risky securities or bitcoins or sports bets or R&D into flying cars etc.
[1] https://fred.stlouisfed.org/search?st=corporate+debt
[2] https://www.sifma.org/resources/archive/research/
[3] https://www.bloomberg.com/news/articles/2017-08-15/amazon-is...
[4] https://www.sec.gov/Archives/edgar/data/1018724/000119312517...
[5] https://en.wikipedia.org/wiki/Interest_rate_parity
[6] https://www.ecb.europa.eu/stats/financial_markets_and_intere...
Almost every major company has been doing it for many years. Especially large companies with tons of cash overseas. Instead of repatriating cash from overseas and paying taxes, corporation borrow against their overseas cash and pay dividends to shareholders or invest.
Imagine if you were APPL and you have $1 billion a in tax haven in europe. You can bring it back to the US and pay 20% in taxes or borrow against that $1 billion and pay 1% in interest.
Edit: @seanmcdirmid
> Except it isn't so much the tax haven in Europe as it is profit stuck in china (their second largest market)
Their second largest market is Europe and has been forever except for a blip in 2015/2016.
And Apple's foreign headquarters is ireland.
Most of apple's overseas profits are registered and kept in europe.
"Apple’s expanding overseas cash pile has drawn scrutiny from the European Commission, which says the company should be paying corporation tax on profits from Europe, Africa, the Middle East and India in Ireland, where it registers those sales."
http://www.telegraph.co.uk/technology/2017/05/01/apples-cash...
Ireland and europe are tax havens for many of the silicon valley companies, including google, facebook, etc.