Despite having $145 billion in the bank, Apple has decided to reach out to the debt market to offer $17 billion in bonds in order to pay money back to investors. Why would Apple need to go to such lengths and what does it mean to investors? We answer your questions.
What is Apple borrowing money for?
When it announced its financial results last week, Apple also revealed a plan to return $100 billion to shareholders by the end of 2015. A year previously Apple had said it would pay $45 billion in dividend payments and share buybacks by the end of 2015, so this is more than double that previous plan. Apple is borrowing money to help it pay money back to shareholders.
Doesn't Apple have a ton of money already, why does it need to go into debt?
Even though Apple has a whopping $145 billion in cash, only $45 billion of it is located in the US, explains Reuters. This means Apple has two choices: it can bring some of its cash back into the US, and pay 35% tax on it; or it can raise $60 billion worth of cash by issuing these bonds.
Given that Apple would lose more than a third to tax if it repatriated the money, it makes more sense for the company to take advantage of what are historically low interest rates on corporate debt, backed by international cash reserves.
Bond interest rates are typically attached to the rates of US Treasury Notes, and they are trading at near 10-year lows. "In short, it's rarely this cheap and easy to get your hands on fresh loans", explains Ars Technica.
What rate of interest is Apple getting?
According to the Wall Street Journal, Apple has been able to borrow at rates nearly as low as the highest-rated triple-A firms in the world. "It borrowed $5.5 billion for 10 years at an annual yield of 2.415%. It also issued three-year debt at 0.511%, five-year debt at 1.076% and 30-year debt at 3.883%. And Apple sold floating-rate bonds that mature in three and five years at rates of 0.05 and 0.25 percentage point over the three-month London interbank offered rate, an industry benchmark," states that report.
Why isn't Apple getting AAA rates?
Apple's debt has been rated at AA-plus by Standard & Poor's Ratings Services and Aa1 by Moody's. It's just shy of the triple-A rating which companies like Microsoft, Exxon Mobil, Automatic Data Processing, and Johnson & Johnson. Why did Apple not get a AAA credit rating? S&P said its rating reflects the expectation Apple will maintain "excellent liquidity and significant net cash," while Moody's blamed Apple's imperfect rating the "highly volatile industry" and the fact that it needs to raise $50 billion over the next five or six years, writes Bloomberg.
Credit ratings agency Fitch is also concerned, it told Forbes, that Apple could be at risk of an implosion similar to Sony, Nokia, and Motorola Mobility. "Cupertino simply doesn't have the long-term contracts that a true top-notch credit rating requires", explains Ars Technica.
What is an Apple bond?
Apple offered floating-rate notes that mature in 2016 and 2018 and fixed-rate securities that are due in 2016, 2018, 2023 and 2043, according to a regulatory filing.
The following bonds were available:
- $1 billion, floating rate, three year maturity
- $1.5 billion, fixed-rate, three year maturity
- $2 billion, floating-rate, five year maturity
- $5.5 billion fixed rate, ten year maturity
- $4 billion fixed rate, five year maturity
- $3 billion fixed rate, thirty year maturity
We wonder what Apple will be worth in 2043…
Is an Apple bond a good investment?
Investors know that Apple has the money to pay them back. They are also a good alternative to treasury bonds, as explained by Sage Advisory Services Mark MacQueen, who told WSJ: "Apple bonds are a low-risk alternative to Treasury bonds in this yield-grabbing environment."
However, there are still risks. MarketWatch outlines the risks of buying the bonds: “While the Federal Reserve has been holding rates down to spur economic growth, that won’t last forever. When rates climb, bond prices fall, meaning investors in Apple bonds could lose money even if the company’s next big product is as big a hit as the iPhone or iPad. Indeed, investors have pulled more than $1 billion from the iShares investment-grade bond ETF so far this year."
Who's selling Apple bonds?
Goldman Sachs Group and Deutsche Bank are the underwriters.
Who's buying the Apple debt?
According to the WSJ, investors came from all over the credit markets, including overseas buyers and municipal-bond investors, and portfolio managers who would normally look for "ultrasafe government debt". Pension funds, insurance companies and hedge funds also bought Apple bonds.
How much Apple debt has been bought?
According to reports, by Tuesday morning the bankers had enough investors to sell the Apple debt two times over. Reuters sources claimed investors could "barely submit orders fast enough to get in on the deal from Apple, the only major tech company without a single penny of debt on its books". By midday there were more than $50 billion of orders. By the end of the day $52 billion was being offered for just $17 billion bonds. It was "one of the most hotly desired bond deals Wall Street has ever seen", according to bankers at Deutsche Bank.
Even after the markets had closed, investors who didn't get in on the deal were clamoring to buy bonds in the "grey market" – buying from investors who had got in on the initial offering. Investors can use this market to buy bonds after a deal has been launched but before the bonds are tradable, according to the WSJ.
By the end of the day the breakdown was as follows, according to Benzinga.
- $5.5 billion 10-year bonds priced to yield 2.415 percent, a spread of 75 basis points over the 10-year Treasury.
- $1.5 billion in 3-year notes priced to yield 0.511 percent, a spread of 20 basis points over similar Treasuries.
- $4 billion of 5-year notes priced to yield 1.076 percent, a spread of 40 basis points to the 5-year Treasury.
- $3 billion in 30-year bonds priced to yield 3.883 percent, a spread of 100 basis points over the 30-year Treasury.
- $1 billion of 3-year floating rate notes to yield 5 basis points above the 3-month Libor rate.
- $2 billion of 5-year floating rate notes to yield 25 basis points above the 3-month Libor rate.
Has Apple ever done anything like this before?
Yes. But this is Apple's first bond offer in almost 20 years.
How does this compare to other bond deals?
Reports claim that this is the largest non-bank bond deal in history. Apple put up $17 billion for sale which trumps the $14.7 billion deal from Abbott Laboratories spin-off AbbVie last November
However, another report suggests that Automaker General Motors may have a bigger offering, when they sold $17.5 billion in bond financing in 2003, notes ArsTechnica.
Incidentally, Microsoft sold debt that matures in 10 years at a yield of 2.413% last week, nearly the same rate as the lower-rated Apple.
Why does Apple need to pay money to investors?
ArsTechnica looks into this and concludes that Apple is catering to value and dividend investors, a demographic that "loves companies that hand out cash to shareholders, and debt is a perfectly acceptable source of financing for such policies."
Greenlight Capital Fund manager David Einhorn caused a stir earlier this year when he sued Apple over legislation that he believed would make it impossible for the company to issue preferred stock to shareholders. He should be happy about Apple's plans to return money to shareholders.
All this to avoid paying tax… Which, according to the Financial Times, could have been $9 billion.
AAPL closed at $442.78 last night, up from a low of $390.53 on 19 April.