Steve Schaefer
Apple launched its first debt offering in almost 20 years Tuesday and by all accounts demand for the new six-part issuance was so robust the iPhone-maker will pay interest rates near or below Corporate America’s lowest.
The company reportedly raised $17 billion in a heavily-oversubscribed offering, with all six tranches at narrow spreads to their benchmarks: three-month Libor for three and five-year floating rate notes and the similar-maturity Treasuries for three, five, 10 and 30-year fixed-rate notes.
In fact, at a reported 75 bps above the corresponding Treasury, Apple’s 10-year unsecured notes would carry a lower rate than the stock’s dividend yield (~2.40% vs. 2.75%). That might seem surprising, but it shouldn’t in a world where 280 members of the S&P 500 carry dividend yields above the current rate on the 10-year Treasury. And Apple is hardly the only company that has borrowed extremely cheaply — IBM IBM -1.44% and Microsoft MSFT -1.06%issued 10-year paper last year at 1.875% and 2.125%, respectively.
Apple has not yet confirmed the results of the debt offering. The company is borrowing to fund an upsized capital return program intended to deliver $100 billion to shareholders by the end of 2015, and to do so without having to repatriate cash held overseas and pay the requisite taxes. (See “Paging David Einhorn: Apple Superzies Buyback.”)
Scott Rostan, founder of Training The Street and an adjunct professor at the UNC’s Kenan-Flager Business School, said the incredible demand for Apple’s offering “dramatically highlights the new reality of this low interest rate environment.”
Even in that environment, with the rates on Apple bonds so low isn’t the stock a better bet?
It could very well be says Rostan, but after a months-long stretch where it yo-yoed from $705 to $385 back up to the current level near $450, he’s more confident in the bonds as a safe parking spot than the stock as a guaranteed winner.
So who might be buying the Apple offering? Well there is probably no shortage of investment-grade managers interested in diversifying their holdings, and adding a blue-chip name like Apple to the portfolio probably looks attractive, even at just an incrementally higher yield than the relatively few AAA-rated issuers out there. (S&P and Moody’s assigned Apple the equivalent of a AA+ rating, while Fitch said it merited a rating at the high end of the A range.)
“This could be a trade up,” Rostan says, “the risk of capital loss is close to zero and you get another few basis points, which in this market can be meaningful.” And don’t underestimate the inclination to stick with the crowd.
“For a professional fund manager owning Apple’s bonds won’t make you look stupid, because everyone will own it,” Rostan says. More importantly, there won’t be any real concern of getting stuck in Apple’s debt, given that the size of this offering should lead to an extremely liquid market at a time when the toxic asset lessons of 2008 are still fresh in the minds of many fixed-income investors.
For those concerned that the proceeds of the bond offering are going to fund a share repurchase program that the company recently increased by $50 billion, it’s worth remembering that even amid concerns that it’s dominance in consumer technology has eroded Apple still throws off billions in cash every quarter, adding nearly another $8 billion to its cash pile in the first three months of 2013 alone.
At $17 billion, Tuesday’s deal, led by Goldman Sachs Group GS -2.37% andDeutsche Bank , is the largest non-financial corporate offering on record, ahead of last year’s $14.7 billion deal from AbbVie ABBV -1.09% — in connection with its spinoff from Abbott Laboratories ABT -0.08% — and a $16.5 billion bond sales by Roche Holdings in 2009.
