Apple Finds Bond Concessions Cheaper Than Foreign Cash

For the second time in 12 months, Apple Inc. tapped debt markets instead of repatriating overseas cash to finance shareholder rewards. Only this time, it’s paying premiums to its existing bonds to avoid taxes.

While yields in the $12 billion sale yesterday ended up being lower than initially proposed, they were higher than those on its outstanding bonds. The maker of iPhones and iPads sold $2.5 billion of 10-year notes that yield 77 basis points more than comparably dated Treasuries, below the 90 basis points initially marketed, although more than the 60 basis-point spread on its 2023 securities from last year’s sale in trading last week, before the new bond sale was announced.

“To get the debt placed in the market and have the deal perform well, you’re going to offer a little bit more” interest than the 2023 bonds, Lon Erickson, a Santa Fe, New Mexico-based money manager at Thornburg Investment Management Inc., which oversees about $94 billion and didn’t buy any of the Apple bonds. “I’m sure overall they’re pretty happy with it.”

Even with the higher relative costs, borrowing in the bond market is cheaper than the levy would be on funds brought into the U.S. from overseas. By taking on more debt, the Cupertino, California-based company is aiming to avoid repatriatiating its offshore money, which makes up 88 percent of its $151 billion of cash and marketable securities.

Shareholder Rewards

Apple returned to debt markets to fund a $30 billion increase to its shareholder-reward program that also prompted its $17 billion offering last year, at the time the largest corporate bond sale on record. Some proceeds will be used for dividend payments, Apple said in a regulatory filing yesterday. The company said last week it will increase its quarterly dividend by about 8 percent.

“To repatriate our foreign cash under current U.S. tax law, we would incur significant tax consequences, and we don’t believe this would be in the best interest of our shareholders,” Luca Maestri, who will soon take over as Apple’s chief financial officer, said on an earnings call last week.

Kristin Huguet, a company spokeswoman, didn’t return a call requesting comment on the sale.

‘Little Risk’

The company sold $2 billion of 2.1 percent, five-year securities at a relative yield of 37.5 basis points, Bloomberg data show. That’s down from about 50 basis points initially marketed, according to a person with knowledge of the sale who asked not to be identified because the detail were private. The coupon compares with a 1.71 percent yield yesterday on its $4 billion of 1 percent debentures due May 2018 and sold last year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The debt due 2019 traded at 100.2 cents on the dollar to yield 2.05 percent at 12:26 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Most of the bonds sold yesterday rose above face value, with the exception of the 30-year maturity.

The new bonds are expected to be rated Aa1 by Moody’s Investors Service, Bloomberg data show.

“There is very little risk to Apple’s ability to pay back their bondholders,” said Anil Doradla, a Chicago-based analyst at William Blair & Co. “They do have cash in the bank, so the worst-case scenario is they just pay the taxes and repatriate the cash.”

Last year’s sale came more than nine years after the company cleared its balance sheet of bonds when the $300 million of 6.5 percent, 10-year notes it sold in February 1994 matured, Bloomberg data show.

Rising Yields

The bonds due in 2023 traded at 93 cents on the dollar to yield 3.3 percent at a spread of 60.5 basis points more than benchmarks yesterday, according to Trace.

Yields on AA rated, dollar-denominated corporate securities reached 2.49 percent yesterday, up 53 basis points from a year ago, Bank of America Merrill Lynch index data show. A basis point is 0.01 percentage point.

In April 2013, Apple locked in borrowing costs that were near all-time lows. The deal’s largest maturity, $5.5 billion of 10-year bonds, were sold with a 2.4 percent coupon to yield 75 basis points more than similar-maturity Treasuries, Bloomberg data show.

Verizon Communications Inc.’s $49 billion offering in September unseated Apple’s 2013 deal as the largest offering on record, Bloomberg data show.

“Apple’s going to last a long time, but in this, you’re not getting compensated for any risk into the future,” William Larkin, a money manager who helps oversees $520 million at Salem, Massachusetts-based Cabot Money Management. “Right now it looks like the most optimal company, and that’s the worst possible time to be lending to Apple. I’d rather be lending to Apple when they trip and fall and need capital. That’s how you make money.”

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