Hedge funds. Derivatives. Treasury bonds. Credit default swaps. Mortgage-backed securities. Fixed-income securities. Even securities in the whole damned first place.
Let’s face it: Finance sounds like a different language to many of us. It’s isolating and frustrating and sometimes sounds pretentious — especially when people in the industry pronounce it “fi-nance” instead of “fi-nance.”
So when the Wall Street Journal writes, “Verizon bond sale would be biggest ever — by far,” it leaves some of us feeling left out on what the whole big deal is, no pun intended. The point is the Verizon bond sale has huge and positive implications for our economy — but without understanding this specific deal, it’s hard to know why.
This past week, Verizon sold almost $49 billion worth of bonds — the largest bond sale deal in history. The last largest corporate-bond sale was Apple’s $17 billion deal in April.
So how do those of us non-“fi-nance” types evaluate what the Wall Street Journal refers to as a deal so enormous that it “has surprised even the banks selling the bonds?” It leaves us wondering how and why we should care, and what it means in the first place.
First of all, what the hell is a bond?
It’s a private “I owe you.” On a small scale, if you owe your friend $20 on a lost bet, and can’t pay him back right away, your other friend can front you the money and charge you a little bit of interest per day or per week until you pay him back. In the same way, Verizon's $49 billion bond will be broken down into smaller amounts and potentially purchased by thousands of investors — insurance companies, investment companies, institutional buyers, pension funds, and wealth managers, to name a few.
Typically, when you think of a loan, it's issued from a bank to the consumer. A bond, however, is a loan from the consumer to the bank or government. So if you purchase a government bond, for example, you're essentially loaning the government a certain amount of money that they will pay you back with interest.
This is a good source for understandable financial information. They define a bond as “a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.” Companies, municipalities, states, and governments use bonds to finance projects and activities.
But the definition goes on to say that bonds are “commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.”
Let’s stop there.
Back to the news, Verizon sold $49 billion worth of bonds on Wednesday. They owned 55% of Verizon Wireless and they now want to own all of it, i.e., they want to buy the other 45% of it, which Vodafone owns.
First of all: Yes. Verizon Wireless is a separate company from Verizon. Thank you, Slate, for putting it simply: “Most consumers probably (and sensibly) assume that Verizon already owns Verizon Wireless, since the companies share a logo and a name.”
Regardless, Verizon offered $130 billion for Vodafone’s share. They sold $49 billion in bonds to investors and are putting about $60 billion in Verizon stocks. There is another $12 billion remaining, expected to be raised in the next few weeks.
But still, why should we care? What’s the big picture?
According to a Reuters report, “Bond sales this year have touched $540 billion, marking a 21% increase in U.S. bond sales over the same period last year. Analysts believe that the frenetic demand for the Verizon bonds could inspire other companies with comparable credit ratings to follow suit, as record-low interest rates might begin moving up beyond the near term.”
It shows that the capital markets are wide open and companies are getting more aggressive with investing. The market is healthy when big debt offerings like this exist. People are confident enough in companies putting on financing to buy businesses that they're investing in their debt.
On a more macro policy level, it could also signify that the Federal Reserve continues to keep interest rates artificially low (by buying bonds) which will lead to too much debt (too many bonds) existing in the market for the U.S. government and corporations. Imagine if you made no money and every time you wanted to buy something, you had to borrow it. And the U.S. government kept your interest rate at $1 per year per time you borrow. You'd borrow a lot, right? Well, what if they change their minds in the future and allow that $1 to go to market rates of $10, or those one dollars keep adding up faster than you're able to earn money to pay them back.
It would be a problem.
For Verizon to offer $130 billion for Vodafone’s share by selling $49 billion in bonds to investors in addition to putting up about $60 billion in Verizon stock, with the balance expected to be raised in the next few weeks, they must be betting on something. And that, at some point, will likely affect their competitors and consumers alike — for better or worse.
And neither you, I, the bond buyers, nor the experts can accurately predict what that impact will be.
But we do know some bottom lines: A bond is an IOU. A massive deal was made. Verizon and Verizon Wireless are, in fact, different companies. Capital markets are wide open.
And it’s still pretentious to say “fi-nance.”