Apple, Inc. Market Cap (as of 03/05/13): $418.2 bn
Transaction Size: $17.0bn
On the 30th of April Apple Inc. has set a new corporate record. In fact, after having recently regained its position as the world’s most valuable company and having announced the largest share buyback in history, it sold $17bn of bonds, the largest corporate-bond deal in history.
As was described in the previous newsletter, Apple announced one week ago to return $100bn to shareholders by the end of 2015 and this debt borrowing is part of the plan.
In particular, Apple was able to borrow the money at historically low costs, taking advantage of both a sharp decline in Treasury interest rates (on Monday the 10-year note showed the lowest yields this year, at 1.65%) and an incredible appetite shown by investors. In fact, the technology company, despite not being rated AAA, was able to borrow at rates nearly as low as the highest-rated triple-A firms in the world, like Microsoft. Goldman Sachs and Deutsche Bank, underwriters of the offering, sold the notes to investors from all over the market places, from municipal-bond investors to portfolio managers, who typically prefer government bonds, but also pension funds, insurance companies and hedge funds took part in the deal. The $52bn worth of orders demonstrate how investors were excited to add a new name to their debt portfolios.
As previously mentioned Apple did not received a AAA rating. In fact, Moody’s rating was Aa1 and the S&P rating was AA+, both rating are a level below the top investment grade level that companies like Microsoft Corp. and Johnson & Johnson hold. It appears strange that a company like Apple, which has $145bn in cash, is rated below the highest investment grade as its cash is several times more than what is needed to service the $17bn bonds it sold to investors on Tuesday. However the problem with the rating is that Apple is operating in a business, where constant innovation is key to success and lately Apple has failed to give details on new products like the smart-watch or the apple TV; there have thus been rising concerns on how successful these products could be. Moreover, ever-changing consumer tastes place greater insecurity in the stability of cash flows versus companies like Microsoft which generate sales from a recurring fee business model. Rising competition from rivals like Samsung, Nokia, HTC etc. has bit into the market share of Apple in the last year showing that maybe it is time for Apple to turn into a value stock after the long ride of growth.
The approximate $16.9bn proceeds from the issuance will be used by the company to complete the repurchase of common stocks and the payment of dividends. Even if this offer may not sound appropriate, considering the $145bn cash on stockpile, the geographic location of this huge amount of cash explains the reason of the offer. In fact, only $45bn is held in the US, and Apple would have paid as much as 26% in tax to bring cash back into the US.
At this point the comparison is pretty straightforward. In fact, borrowing will cost around $310m a year in interest payments, but the company will regain about a third of that due to tax deductions every single year. On the contrary, repatriating that cash, would cost Apple approximately $7.8bn per year (at a 26% tax rate).
Apple’s offering is coming nine years after the $300 mln of 6.5% 10-year notes it sold in February 1994. After that issuance, Apple offered only new convertible debt in 1996 that was called in 1999. The interest towards Apple’s bond deal on Tuesday stands in contrast to the situation the company faced in 1996 when it earned a junk credit rating.
As regards the structure of the offering it will be divided into six different notes:
3-year $1bn Floating Rate Notes (three-month LIBOR plus 0.05%)
5-year $2bn Floating Rate Notes (three-month LIBOR plus 0.25%)
3-year $1.5bn 0.45% Notes
5-year $4bn 1.00% Notes
10-year $5.5bn 2.40% Notes
30-year $3bn 3.85% Notes
In particular, while interest on the floating rate notes will be paid quarterly, interest on the fixed rate notes will be paid semi-annually. It is worth to underline that Apple does not have the right to redeem the floating rate notes prior to maturity while they keep this right for the fixed rate notes.
According to data the spread paid by the technology company on the fixed rate notes over similar-maturity Treasuries is 20 bp for the 3y, 40 bp for the 5y, 75 bp for 10y and 100bp for 30y.
Below a brief summary of the market’s reaction to the recent developments after the hammered stock price in the last year made Apple the seventh-worst performer in the S&P 500 with a fall of 24%.
April 23, 2013 Apple delivers its Q1 results, missing analysts’ sales, margin and growth estimates. The company increased its quarterly dividends 15% to $3.05 a share. More important was the announcement of the up-grading of the planned share buyback program from $10bn to $60bn.
April 24, 2013 The share price increased 5.9% to $415.25 after the announcement, but did fall back making the day’s overall change around 0.1%. As you can see from the graph, there was a significant volume increase this day.
May 3, 2013 The share traded around $451.00 at 11:45 NY time, which is an increase of 1.25% for the day. The share has risen 8.6% since the announcement of the increased dividends and payback. As you can see from the graph, the share has outperformed both the techological heavy Nasdaq index as well as the broad S&B index.
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