Borrowing billionaires – and why it makes sense

These days, the truly wealthy do not need to invest in bonds to make money. They borrow.

LVMH, Bernard Arnault’s luxury goods conglomerate, has confirmed it is issuing corporate bonds on a negative yield to help pay for its $16 billion purchase of US jeweller Tiffany & Co.

Family offices are in an excellent position to use debt to fund their deals, as long as they don’t actually need the money

Two of its five tranches of debt, totalling an overall $8.3 billion, have been bought by investors on a negative coupon, according to Bloomberg. Which means investors are prepared to pay for the honour of lending Arnault money for two years, or more. 

Back in November, LVMH had expected to achieve yields between 0% and 1%. But these expectations have been beaten.  A new 11-year tranche of debt will only have a coupon of 45 basis points. 

There’s little doubt that LVMH has benefited through the European Central Bank’s bond purchase programme, designed to keep borrowing costs down. 

Central bank purchases of bonds through quantitative easing programmes have dramatically reduced their availability in the open market. And pension schemes and insurers have been piling into those bonds which remain to match their liabilities.

Equitile Investments, the asset manager backed by Thor Johan Furuholmen’s family office has pointed out shareholders in LVMH will not only receive money from bond owners, but benefit from marketing Tiffany in China and Japan, where Arnault’s skills are significant. 

Governments around the world are desperate to prop up their economies to avoid being voted out of office. Fiscal expansion, as well as monetary policy, is likely to be applied in due course

Yields on junk bonds are falling as investors take risks to find a reliable income. Towards the end of last year, Twitter was able to issue junk bonds worth $700 million on a record low yield of 3.9% despite its disappointing earnings record. 

Last November, Furuholmen told Family Capital he had no intention of buying any bonds anywhere at their current price.

But family offices are in an excellent position to use debt to fund their deals, as long as they don’t actually need the money.