Apple Saves $724 Million With Well-Timed Sale: Corporate FinanceMary Childs
Apple Inc. could have hardly picked a better time to borrow an unprecedented $17 billion in its first bond sale since 1996.
The world’s most valuable technology company is pocketing an initial $40 million in annual interest savings compared with current yields on the six bonds it sold, according to data compiled by Bloomberg. The yield on 10-year Treasury bonds, a benchmark for the entire fixed-income market, rose to 2.13 percent by the end of last week from 1.67 percent on April 30, the day of the offering, Bloomberg Bond Trader data show.
The iPhone maker will save $724 million compared with today’s rates over the life of the bonds, Bloomberg data show. Cupertino, California-based Apple tapped the market four days before Berkshire Hathaway Inc.’s billionaire chairman, Warren Buffett, said he felt “sorry” for fixed-income investors with yields so low. Not a week later, Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest fixed-income fund, said the three-decade bull market in bonds probably ended on April 29.
“That’s real money, even to Apple,” David Brown, a money manager who helps oversee $97 billion of fixed-income assets at Neuberger Berman in Chicago, said in a telephone interview. “I don’t know if it was insight or luck, but they timed the market very well, so they were able to capture some very attractive yields to finance their capital plan. Kudos to them.”
Steve Dowling, a spokesman for Apple, declined to comment on the company’s bonds.
The offering was the largest bond sale on record, topping Roche Holding AG’s $16.5 billion six-part deal from February 2009, which included $3 billion of one-year floating-rate debt, and AbbVie Inc.’s $14.7 billion six-part issue in November, Bloomberg data show.
Apple’s notes were ranked Aa1 by Moody’s Investors Service and AA+ at Standard & Poor’s, the second-highest grade at each ratings company.
For similarly rated debt, yields fell to an unprecedented 2.225 percent on May 2 from 8.874 percent in 2008, according to the Bank of America Merrill Lynch AAA-A U.S. Corporate Index. They rose to 2.573 percent by May 31 as investors weighed whether the Federal Reserve may start scaling back the unprecedented stimulus efforts that helped push borrowing costs to historic lows.
Apple’s new debt, its only outstanding bonds, lost $504 million of market value through the end of last week, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt has been the fifth-most actively traded on Knight BondPoint since it was issued.
Those losses were probably mitigated by hedges against rising interest rates, according to Neuberger’s Brown.
“We and many institutional buyers of credit are usually selling either Treasuries or other credit against a purchase like that, so I’m much more focused on spreads as opposed to the all-in yield changes,” he said. “I don’t care nearly as much that it has gone down in dollar price because what I sold against it went down the same. For absolute-return investors, which typically include retail investors, though, the interest-rate move and resulting price deterioration is painful.”
Hedge-fund managers and other large speculators held a net-short position in Treasury futures for the first time in almost two months for the week ended May 14, according to U.S. Commodity Futures Trading Commission data. Bets that prices will fall now outnumber long positions by 35,505 contracts on the Chicago Board of Trade.
Apple sold the bonds to help finance a $55 billion stock buyback, saving as much as $9.2 billion in taxes by avoiding the use of about $100 billion of cash it holds offshore, Gerald Granovsky, an analyst at Moody’s, estimated last month.
Chief Executive Officer Tim Cook defended Apple’s use of offshore tax shelters before U.S. senators on May 21, saying “we pay all the taxes we owe -- every single dollar.”
Gross picked April 29 as the end of a 31-year bond rally, the manager of Pimco’s $293 billion Total Return Fund wrote in a Twitter post on May 10. Buffett isn’t investing in company debt, including Apple’s, because yields are too low, he said May 4 in a Bloomberg Television interview from Omaha, Nebraska, where Berkshire was holding its annual meeting.
Apple’s biggest savings are on its longest-dated securities due May 2043. The $3 billion of 3.85 percent bonds, issued at 99.418 cents, fell to 92.084 cents on the dollar as of May 31, pushing the yield to 4.32 percent, Trace data show. They dropped to 91.83 cents to yield 4.34 percent at 8:54 a.m. in New York today. The extra yield investors demand to hold the debt rather than similar-maturity Treasuries has widened to 103.7 basis points from 100 at issue.
Selling the debt on May 31 would have cost Apple an additional $396.9 million annually for 30 years.
“From a rate perspective, they picked a great day to issue bonds,” Robert Smalley, a strategist at UBS AG in Stamford, Connecticut, said in a telephone interview, noting the 5 basis-point rise in spreads. “The real underperformance has been because of the backup in yield. The Apple bonds themselves have held their ground.”