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Apple sells $12 billion in US bonds to fuel capital reinvestment

post #1 of 22
Thread Starter 
Apple fueled excitement among investors on the U.S. bond market this week, when the company brought forward a highly sought after seven-part bond offering valued at $12 billion to help fund its share repurchase plans.




The bond sale issued on Tuesday was less than the $17 billion the company sold in a record setting offering a year ago. But investors believe that Apple isn't done yet, as the company signaled during its quarterly earnings conference call last week that it would likely raise "an amount of term debt financing similar to what we used in 2013," Corporate Comptroller Luca Maestri said.

The expectation is that in addition to Tuesday's $12 billion bond sale, the iPhone maker also plans to turn to foreign debt markets. This would allow the company to diversify its base, and to prevent saturation of the U.S. debt market with such a large sale.
With its U.S. sale completed, investors believe Apple may now turn to foreign markets for debt.
Investors believe Apple is waiting to come to market with potential issues in euros or sterling in the near future, according to Reuters. It is rumored that Apple will target the eurozone for low interest rates on an additional bond offering of around $7 billion.

For now, Apple's $17 billion sale from a year ago marks the second-highest bond offering in corporate history. At the time Apple held the record, but it was eclipsed by Verizon's sale of $49 billion in binds later in 2013.

Tuesday's sale generated excitement, generating more than $40 billion worth of orders in midday trading. Apple's bonds are double-A-plus, which is the second-highest possible rating.

The company sold fixed-rate bonds that mature in three, five, seven, 10 and 30 years, along with three-and five-year floaters.

Though Apple has some $150 billion in cash, almost all of that -- $130 billion -- is held overseas. Executives from the company have signaled numerous times, including last week, that they have no plans to repatriate the overseas cash, citing high tax rates for bringing the money to the U.S.

As a result, Apple has sought out more cash to increase its share buyback efforts, which are now totaled at $90 billion through the end of 2015. Apple initiated its massive capital reinvestment program to signal to investors that it is confident in the future of its business with continued strong iPhone sales and new products on the horizon.
post #2 of 22
Apple sounds more and more like a well run and financially successful country!
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From Apple ][ - to new Mac Pro I've used them all.
Long on AAPL so biased
Google Motto "You're not the customer. You're the product."
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post #3 of 22
Who knows, if the US increases their business-hostile tax policies, perhaps one day Apple will move their entire operation out of California...or out of the US.

Proud AAPL stock owner.

 

GOA

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Proud AAPL stock owner.

 

GOA

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post #4 of 22
A few of the shorter term issuances within this overall offering were at interest rates lower that Apple's dividend yield, which, assuming a $600 stock price is 2.2%. For at least those parts of the offering, or perhaps the entire offering when averaged together, it makes perfect sense to take on debt to remove shares from the market. I recall last year Apple borrowed below its stock's yield, saving itself more in dividend payments on the subsequently retired shares than the service on that debt. Through the lens of recent history, Apple's moves, both in the way it manages its finances and the way it manages its business, always look to be brilliant.
I don't care about what the ignorant masses perceive as truth. I'm concerned with the facts on the ground.
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I don't care about what the ignorant masses perceive as truth. I'm concerned with the facts on the ground.
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post #5 of 22
Students of business finance will find this fascinating. Borrowing money to buy back shares while you still have a ton of money in the bank. I'm sure this is getting covered in many business schools that have capitalization structure on the syllabus this semester.
post #6 of 22
Quote:
Originally Posted by RadarTheKat View Post

A few of the shorter term issuances within this overall offering were at interest rates lower that Apple's dividend yield, which, assuming a $600 stock price is 2.2%. For at least those parts of the offering, or perhaps the entire offering when averaged together, it makes perfect sense to take on debt to remove shares from the market. I recall last year Apple borrowed below its stock's yield, saving itself more in dividend payments on the subsequently retired shares than the service on that debt. Through the lens of recent history, Apple's moves, both in the way it manages its finances and the way it manages its business, always look to be brilliant.

That's the 'Tim Effect'. 1smoking.gif
From Apple ][ - to new Mac Pro I've used them all.
Long on AAPL so biased
Google Motto "You're not the customer. You're the product."
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From Apple ][ - to new Mac Pro I've used them all.
Long on AAPL so biased
Google Motto "You're not the customer. You're the product."
Reply
post #7 of 22
I plead complete ignorance. Okay, Apple issues $12B in bonds, yet the article says, in response by midday Tuesday, there was $40B in orders.

Explain this to me.
post #8 of 22
Quote:
Originally Posted by MidwestAppleFan View Post

Students of business finance will find this fascinating. Borrowing money to buy back shares while you still have a ton of money in the bank. I'm sure this is getting covered in many business schools that have capitalization structure on the syllabus this semester.

Why is this fascinating? If your cash, used for productive purposes, is making you 10% profit, why would you not borrow money at an interest rate of 1%?  A 9% spread is pretty good, and I would expect the spread for Apple is much better. Also, there is a liquidity case to be made and a privacy case to be made. With liquidity, you can pull the trigger on a purchase whenever your want, without having to negotiate with a bank first. Second, you can buy with cash without having tell anybody; you cannot do that with bonds -- people buying your bonds will want to know why?

 

Of course, for businesses, interest paid is tax deductible. 

post #9 of 22
Quote:
Originally Posted by MidwestAppleFan View Post

Students of business finance will find this fascinating. Borrowing money to buy back shares while you still have a ton of money in the bank. I'm sure this is getting covered in many business schools that have capitalization structure on the syllabus this semester.

It's only because the vast majority of the "ton" is overseas and would be subject to a 30% tax if used to buy shares, right?  Apple "only" has something like $20B in the US so they don't want to deplete that rainy day fund with the stock buyback.

post #10 of 22
Quote:
Originally Posted by waldobushman View Post
 

Why is this fascinating? If your cash, used for productive purposes, is making you 10% profit, why would you not borrow money at an interest rate of 1%?  A 9% spread is pretty good, and I would expect the spread for Apple is much better. Also, there is a liquidity case to be made and a privacy case to be made. With liquidity, you can pull the trigger on a purchase whenever your want, without having to negotiate with a bank first. Second, you can buy with cash without having tell anybody; you cannot do that with bonds -- people buying your bonds will want to know why?

 

Of course, for businesses, interest paid is tax deductible.

I seriously doubt that Apple is making a 10% return on that overseas money that they can't bring back to the US.  This is a case of picking the lessor of two "evils": borrowing money at a historically low interest rate or using overseas cash after paying a 30% tax.  Pretty easy choice.

post #11 of 22
Quote:
Originally Posted by waldobushman View Post

I plead complete ignorance. Okay, Apple issues $12B in bonds, yet the article says, in response by midday Tuesday, there was $40B in orders.

Explain this to me.

Demand exceeds supply. That's all.

post #12 of 22
well, I find I can say this finally: SJ would never do this. But again, SJ's suggestion to Tim Cook is never thought what he would do but do what is right for Apple.
post #13 of 22

I agree with above. SJ would never take on debt. But it's smart, financially. It pleases wall street to see Apple make financially astute maneuvers.

 

I don't understand the demand for the bonds. Interest rates are not going down (bond prices are inversely related to interest rates; rates go up, bond prices fall. Longer bonds fall harder).

 

We may hang with low rates for a while longer but rates are undoubtedly going up. Holders of 30 year bonds are going to be psychologically damaged.

post #14 of 22
According to Reuters and as stated above apple is going to issue bonds in the EU in euro or sterling. This baffles me. Why does apple need euro or sterling? It's massive cash hoard is loaded with these two currencies.

Only reason would be that apple is making more with its cash hoard abroad than what it's going to pay out for taking on debt. But I doubt it. I think it's making peanuts on its cash. Any insight?
post #15 of 22
This may be blindingly obvious to everyone else so please excuse me for asking a possibly ridiculous question, but can Apple issue bonds in the EU and use the proceeds tax free in the US but service the debt using their overseas cash hoard? (Effectively dodging paying US income tax on that money)
Edited by blurpbleepbloop - 4/30/14 at 10:02pm
post #16 of 22
If that is the case wouldn't they isse more debt in the EU? I mean much more. This way they could effectively repatriate large sums maybe even all of the foreign debt, legally and virtually cost free.
post #17 of 22
Quote:
Originally Posted by bugsnw View Post
 
Holders of 30 year bonds are going to be psychologically damaged.

And, given that they are willing, knowledgable, buyers in a competitive market with lots of investment opportunities, this matters to you or bothers you how?

post #18 of 22
Quote:
Originally Posted by anantksundaram View Post
 

And, given that they are willing, knowledgable, buyers in a competitive market with lots of investment opportunities, this matters to you or bothers you how?

 

It doesn't. It's just conversation.

post #19 of 22
Quote:
Originally Posted by Beluga View Post

According to Reuters and as stated above apple is going to issue bonds in the EU in euro or sterling. This baffles me. Why does apple need euro or sterling? It's massive cash hoard is loaded with these two currencies.

 

 

Quote:
Originally Posted by blurpbleepbloop View Post

This may be blindingly obvious to everyone else so please excuse me for asking a possibly ridiculous question, but can Apple issue bonds in the EU and use the proceeds tax free in the US but service the debt using their oversees cash horde? (Effectively dodging paying US income tax on that money)

 

I think the answer to beluga's question lies in blurpbleepbloop's question (the answer to which may be 'yes,' if it's Apple's subsidiary in Europe that is officially issuing the foreign currency debt, and is then providing an intra-company loan to Apple USA!).

post #20 of 22
>Holders of 30 year bonds are going to be psychologically damaged.

You're assuming they're all just trying to maximize their return. If you're a pension fund (which are a significant part of the market at the ling end of the curve), all you care about is that you don't run out of money before you pay off your pensioners. It's irrelevant out you if interest rates are 10% by the time you do.

Also, FWIW, people have been saying for 5 years now that interest rates are heading higher and investors in long bonds are going to get killed. Yes, they have lost a bit in price, but the interest they have made over that time period has more than made up for it. Rates need to head higher fairly quickly for it to be a real losing proposition.

Finally, the $40bn in orders probably is in fact a sign the deal went well, but take it with a grain of salt. It's usually kind of a phony number. For institutional investors, if they want $10 million in bonds and they hear the deal is going well, they assume they are going to be cut back and only get a portion of what they put in for. So they pad the order and turn in an order for $30mm. And if they end up getting $20mm, they can always sell the extra.
post #21 of 22
Quote:
Originally Posted by mubaili View Post

well, I find I can say this finally: SJ would never do this. But again, SJ's suggestion to Tim Cook is never thought what he would do but do what is right for Apple.

 

A corporation's job is to maximize shareholder value. If shareholders can earn a greater return on cash than the corporation can, the corporation is doing a disservice to shareholders by refusing to distribute the cash. Apple's cash balance exceeded $100 billion in April 2012, when Apple announced a dividend and buyback plan. Apple had repeatedly said that they have more cash than they need. Explain to me how that wouldn't have been the case had SJ been CEO.

 

Whether or not to do a capital distribution is one part of the decision. The other part is how to finance it. Apple doesn't have enough cash in the US to finance its dividend/buyback plan. That's why Apple issued debt-in order to finance the dividend/buyback plan. That seems like the only reason Apple issued the debt. What would SJ have done differently if he decided to do a dividend/buyback plan, which I think he very would have done?

 

You said it yourself-SJ himself told Tim Cook to never think about what he would have done and to do what's best for Apple. If that's the case, why even make the comment that SJ would never have issued debt, which again, I think is doubtful? Maybe it's time people stopped comparing Tim Cook to Steve Jobs.

post #22 of 22
Quote:
Originally Posted by vvswarup View Post
 

 

 Maybe it's time people stopped comparing Tim Cook to Steve Jobs.

 

It should have ended long ago. Trying to second guess the deceased and use it as reasoning for anything is just beyond ridiculous.

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