Apple to raise $3.5 billion from euro debt at some of the lowest interest rates in history

Posted:
in AAPL Investors edited November 2014
Apple is set to borrow cash in euros for the first time in the company's history, taking advantage of record-low interest rates in Europe with what will be some of the lowest-ever interest rates for a corporation.

Apple


Apple is planning to issue two sets of euro debt maturing in eight and 12 years, according to The Wall Street Journal. With those bonds, the company will raise $3.5 billion U.S., or 2.8 billion euros, to help finance share buybacks and dividends.

The eight-year notes are expected to have a yield of about 1.1 percent, while the 12-year notes will offer 1.7 percent. The bonds will have the lowest yields ever paid for such euro-denominated corporate maturities, and are even lower than the rates Spain and Italy pay for similar maturity debt.

Borrowing costs in Europe are exceptionally low at present because the continent's central bank has deflated interest rates in an effort to boost the local economy. Apple held a call with investors on Monday to discuss the bonds, which represent the first time ever the company will offer bonds in euros.

Most of Apple's huge sum of cash is held overseas, and repatriating it to buy back shares or issue dividends would cost the company a considerable sum in U.S. taxes. As a result, Apple has opted instead to borrow, in addition to using its domestic cash, to fund its capital return program.

As of last quarter, Apple had $155.2 billion in cash and marketable securities. Apple has said multiple times that it has no plans to bring its cash back to the U.S. because of high tax rates.

Apple issued a $17 billion six-part bond offering in 2013, which at the time was the largest ever for a U.S. corporate offering. The company made another $12 billion bond sale earlier this year.
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Comments

  • Reply 1 of 74
    blazarblazar Posts: 270member
    This means my stock will likely cont. to go up up but does it mean that we will see no products as a result? Only time will tell...
  • Reply 2 of 74
    Quote:
    AppleInsider:




    Apple is planning to issue two sets of euro debt maturing in eight and 12 years, according to The Wall Street Journal. With those bonds, the company will raise $3.5 billion U.S., or 2.8 billion euros, to help finance share buybacks and dividends.



    Most of Apple's huge sum of cash is held overseas, and repatriating it to buy back shares or issue dividends would cost the company a considerable sum in U.S. taxes. As a result, Apple has opted instead to borrow, in addition to using its domestic cash, to fund its capital return program.

     

    This is potentially misleading: as I understand it, Apple cannot use its non-US debt (instead of cash held abroad) to fund a capital return program in the US. The IRS will come down hard on a tax-avoidance strategy like that.

     

    I doubt very much that Apple will want to push that envelope in the current environment.

  • Reply 3 of 74
    Means dividends will rise, share price will increase, value of Apple will increase with no increase in productivity. Apple is simply unable to figure out what to do with the cash it earns.

    It probably should be buying up content providers, broadcasters, tv manufacturers.
  • Reply 4 of 74
    blastdoorblastdoor Posts: 1,954member

    If the Germans regain control of the ECB this might not look like such a smart move for Apple. If deflation takes hold in Europe it will mean that real interest rates are higher than nominal interest rates. That's not good for somebody who owes money. 

  • Reply 5 of 74
    malaxmalax Posts: 1,598member
    Quote:
    Originally Posted by anantksundaram View Post

     

    This is potentially misleading: as I understand it, Apple cannot use its non-US debt (instead of cash held abroad) to fund a capital return program in the US. The IRS will come down hard on a tax-avoidance strategy like that.

     

    I doubt very much that Apple will want to push that envelope in the current environment.


    I was wondering that myself.  Why does Apple need even more money overseas?  Maybe they just figured 1.1% was just too good to pass up.

  • Reply 6 of 74
    Quote:

    Originally Posted by waldobushman View Post



    Means dividends will rise, share price will increase, value of Apple will increase with no increase in productivity. Apple is simply unable to figure out what to do with the cash it earns.



    It probably should be buying up content providers, broadcasters, tv manufacturers.



    What the hell are you talking about?

     

    Apple knows exactly what they want to use their cash for.

     

    They are using debt to avoid bringing back their overseas cash for dividends and buybacks SO they still have cash in the US to use for things like acquisitions.

     

    Please, enlighten us, what master plan are Apple missing out on by not purchasing providers, broadcasters and TV manufacturers? As it seems you are in a better standing than Apple in their own arrangements.

  • Reply 7 of 74
    inklinginkling Posts: 731member
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  • Reply 8 of 74
    h
  • Reply 9 of 74
    Quote:

    Originally Posted by anantksundaram View Post

     

    This is potentially misleading: as I understand it, Apple cannot use its non-US debt (instead of cash held abroad) to fund a capital return program in the US. The IRS will come down hard on a tax-avoidance strategy like that.

     

    I doubt very much that Apple will want to push that envelope in the current environment.


     

    Quote:

    Originally Posted by malax View Post

     

    I was wondering that myself.  Why does Apple need even more money overseas?  Maybe they just figured 1.1% was just too good to pass up.


     

    It technically isn't non-US debt. It's Apple Inc. borrowing, it's just not in dollars, its Euros. It's not money that is going to be overseas in one of their subsidiaries, it is still debt that has been created in the US.

     

    With the IRS and the taxes side of things, that is centered around capital gains on sales, and the 35% duty on bringing that cash back (in their European cash hoard).

     

    But the same rules don't apply with lending. Apple, as an American company is lending money from banks overseas in Euros, but that debt is has it's own special rules.

     

    It all pretty much works out the same, though, Apple cannot use it's overseas cash hoard to pay off the debt, only the money it has in the US. 

     

    The reasoning is purely behind the interest rates and exchange rates, it's cheaper to lend Euros than Dollars right now. That, and the dollar is getting stronger and stronger once more. 

  • Reply 10 of 74
    mde24mde24 Posts: 27member
    Quote:



    Originally Posted by anantksundaram View Post

     

    This is potentially misleading: as I understand it, Apple cannot use its non-US debt (instead of cash held abroad) to fund a capital return program in the US. The IRS will come down hard on a tax-avoidance strategy like that.

     

    I doubt very much that Apple will want to push that envelope in the current environment.


     

    Apple Inc. [USA] would have to pay tax on monies transferred to it from Apple Sales International [Republic of Ireland]. Apple Inc. is permitted to borrow money anywhere in the world, including Europe. The money that it borrows is Apple Inc.'s money - not ASI's - and it can use it for whatever purposes it sees fit, including paying dividends or buying back stock. Interest on the debt has to be payed by Apple Inc., not ASI but is payed out before tax is deducted.  Repayment of the bonds upon maturity must be undertaken by Apple Inc. out of taxed income, but I suspect Apple's management team are expecting there to be some form of tax holiday where they can repatriate at least some of ASI's hoard at a reduced tax rate before the bonds mature.

  • Reply 11 of 74
    blastdoorblastdoor Posts: 1,954member
    Quote:

    Originally Posted by waldobushman View Post



    Means dividends will rise, share price will increase, value of Apple will increase with no increase in productivity. Apple is simply unable to figure out what to do with the cash it earns.



    It probably should be buying up content providers, broadcasters, tv manufacturers.

     

    It would only make sense to buy those other companies instead of AAPL if you expect those other companies to grow profits faster than Apple. I certainly don't expect that, so given a choice between Apple buying AAPL and Apple buying a slow-growth company, I'd rather Apple buy AAPL. 

     

    Apple does buy some companies, but the companies Apple tends to buy are seen as valuable to Apple because they bring in productive assets that can contribute to the production of Apple's existing products (for example, the companies Apple bought for their CPU/SOC design expertise). So that makes sense. 

     

    It would also make sense to spend money on building stores, factories, funding R&D, etc. And Apple does do those things. 

     

    It's just that Apple generates so much profit that management simply cannot figure out how to productively invest it. I wish management could figure out a way to productively invest it, but I appreciate that it's very challenging. 

     

    Some ideas I can think of beyond what they're doing (but frankly don't add up to much):

     

    1. Invest to develop CPUs for the Mac and for data centers. This might be a good return on investment because Intel has a ~60% gross margin for the CPUs it sells to Apple. Developing its own CPU for the Mac and data center servers would allow Apple to grab a larger share of those profits. That *might* be worth it if Mac sales continue to grow and the development costs of revising the A8 for the Mac and data center aren't too high. But this would probably be a small amount of money -- almost certainly less than $5 billion (maybe a lot less, given all the investments they've already made in SOC design).

     

    2. Invest to make customized GPU designs in the same way they currently make customized CPU designs. It's hard for me to assess the benefits of this... it seems their GPUs are just fine and they aren't paying Intel-like prices to get them. But as they find themselves increasingly competing with Nvidia SOCs, it could be that they will need to step up their GPU game. 

     

    3. Fund more battery R&D. They might already be doing this, but if not then this might make sense. Clearly battery power is hugely important for their products. Any competitive advantage that they could get here would be helpful. 

     

    4. Invest to make their own cellular chips. Right now Apple pays a lot to Qualcomm for cellular modems. Taking this in-house *might* be worth the investment, and it probably would cost a lot, so this could add up to something (probably less than $5 billion again, though). 

     

    Even if we assume each of these costs $5 billion (which is probably an overestimate), this is "only" $20 billion. 

     

    It's just really hard to spend that much money in a way that generates a higher return than just buying back AAPL shares. 

  • Reply 12 of 74
    mazecookie wrote: »

    The reasoning is purely behind the interest rates and exchange rates, it's cheaper to lend Euros than Dollars right now. That, and the dollar is getting stronger and stronger once more. 

    I doubt very much that Apple is in the business of making interest rate or currency bets. That would be quite contrary to its past policies.

    As I mentioned elsewhere yesterday, it's probably for balance sheet hedging reasons, and the (admittedly speculative) possibility that there's something in the works for bring cash back to the US (at a lower tax rate).
  • Reply 13 of 74
    blastdoorblastdoor Posts: 1,954member
    Quote:

    Originally Posted by mde24 View Post

     

     

    Apple Inc. [USA] would have to pay tax on monies transferred to it from Apple Sales International [Republic of Ireland]. Apple Inc. is permitted to borrow money anywhere in the world, including Europe. The money that it borrows is Apple Inc.'s money - not ASI's - and it can use it for whatever purposes it sees fit, including paying dividends or buying back stock. Interest on the debt has to be payed by Apple Inc., not ASI but is payed out before tax is deducted.  Repayment of the bonds upon maturity must be undertaken by Apple Inc. out of taxed income, but I suspect Apple's management team are expecting there to be some form of tax holiday where they can repatriate at least some of ASI's hoard at a reduced tax rate before the bonds mature.




    That makes a lot of sense -- very helpful post. Thanks!

  • Reply 14 of 74
    mde24 wrote: »

    Apple Inc. [USA] would have to pay tax on monies transferred to it from Apple Sales International [Republic of Ireland]. Apple Inc. is permitted to borrow money anywhere in the world, including Europe. The money that it borrows is Apple Inc.'s money - not ASI's - and it can use it for whatever purposes it sees fit, including paying dividends or buying back stock. Interest on the debt has to be payed by Apple Inc., not ASI but is payed out before tax is deducted.  Repayment of the bonds upon maturity must be undertaken by Apple Inc. out of taxed income, but I suspect Apple's management team are expecting there to be some form of tax holiday where they can repatriate at least some of ASI's hoard at a reduced tax rate before the bonds mature.

    I think we're saying the same thing. .
  • Reply 15 of 74
    h
  • Reply 16 of 74
    mde24mde24 Posts: 27member
    Quote:

    Originally Posted by Blastdoor View Post

     

    If the Germans regain control of the ECB this might not look like such a smart move for Apple. If deflation takes hold in Europe it will mean that real interest rates are higher than nominal interest rates. That's not good for somebody who owes money. 


     

    For Apple, it's a currency risk rather than a risk of deflation. Deflation in the Eurozone will only have a negative effect if the Euro strengthens against the Dollar as a result. I suspect Apple will have hedged some of the currency risk and the ultra low interest rates make it worthwhile.

  • Reply 17 of 74
    plovellplovell Posts: 804member

    Why is Apple borrowing Euros? I thought it had piles of cash in Europe already. I can understand borrowing dollars but don't understand this. 

     

    Someone please enlighten me.

  • Reply 18 of 74
    mpantonempantone Posts: 1,429member
    Quote:
    Originally Posted by waldobushman View Post



    Means dividends will rise, share price will increase, value of Apple will increase with no increase in productivity. Apple is simply unable to figure out what to do with the cash it earns.



    It probably should be buying up content providers, broadcasters, tv manufacturers.



    Personally, I am glad that you are not a senior executive at Apple Inc. You would decrease margins and shareholder ROI.

  • Reply 19 of 74
    mpantonempantone Posts: 1,429member
    Quote:
    Originally Posted by plovell View Post

     

    Why is Apple borrowing Euros? I thought it had piles of cash in Europe already. I can understand borrowing dollars but don't understand this. 

     

    Someone please enlighten me.




    This has been covered several times before, including the original article.

     

    BORROWING RATES FOR EUROS ARE AT A HISTORIC LOW.

     

    Sure, Apple has cash here and cash elsewhere, including Europe, but that cash is the result of sales, and therefore subject to U.S. capital gains tax if re-patrioted into the USA. Cash generated from bonds would not be taxed at the same rate as capital gains.

  • Reply 20 of 74
    plovellplovell Posts: 804member
    Quote:

    Originally Posted by mpantone View Post

     



    This has been covered several times before, including the original article.

     

    BORROWING RATES FOR EUROS ARE AT A HISTORIC LOW.

     

    Sure, Apple has cash here and cash elsewhere, including Europe, but that cash is the result of sales, and therefore subject to U.S. capital gains tax if re-patrioted into the USA. Cash generated from bonds would not be taxed at the same rate as capital gains.


     

    Maybe I didn't explain my question well enough. Or maybe I'm just thick.

     

    Apple's cash in Europe can't be repatriated to the U.S. without paying a lot in tax. Got that.

     

    But why would Apple borrow Euros, presumably to invest in the Eurozone somewhere, when they already have more stored there than they know what to do with? Or is the plan to borrow Euros, convert to dollars and move them to the U.S.? If so, why borrow Euros? Why not borrow dollars directly, in Europe?

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