Apple Raises $17 Billion in Bond Market

Largest corporate bond sale on record helps company finance shareholder rewards while avoiding repatriation taxes.

Apple Inc., the iPhone maker seeking to help finance a $100 billion capital reward for shareholders, sold $17 billion of bonds in the biggest corporate offering on record.

Apple issued $3 billion of floating-rate notes and $14 billion of fixed-rate securities in six parts with maturities from three to 30 years, according to a person familiar with the offering. Proceeds may help the company avoid repatriation taxes on its $102.3 billion of funds held overseas as Chief Executive Officer Tim Cook returns an additional $55 billion to shareholders through 2015 to compensate for a stock that’s been hammered by signs of slowing growth.

“It’s a high-quality name which brings in a lot of different kinds of buyers,” Ashish Shah, the head of global credit investment at New York-based AllianceBernstein LP, which oversees $256 billion in fixed-income assets, said in a telephone interview.

The offering, Apple’s first since 1996, was managed by Goldman Sachs Group Inc. and Deutsche Bank AG and follows a $1.95 billion dollar sale last week from Microsoft Corp.

Apple’s offering is the largest bond sale on record, Bloomberg data show. The deal topped 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, the data show.

“There’s strong demand for bonds across the board,” Anthony Valeri, a market strategist with LPL Financial Corp. in San Diego, which oversees $350 billion, said in a telephone interview. “When you bring in a new name to a starved market I think it will be well received.”

The order book for Cupertino, California-based Apple’s offering, a gauge of investor demand for the debt, reached $50 billion, a person familiar with the transaction said.

Average yields on investment-grade debt worldwide dropped to a record-low 2.45 percent yesterday from 3.37 percent a year ago, according to Bank of America Merrill Lynch’s Global Corporate Index.

Apple’s $1 billion of floating debt due 2016 pays 5 basis points, or 0.05 percentage point, more than the three-month London interbank offered rate, and its $2 billion, five-year floater potentially yield 25 basis points more than the benchmark, said the person familiar with the offering.

 

Fixed-Rate

The $1.5 billion of three-year debt pay 20 basis points more than similar-maturity Treasuries; $4 billion of five-year notes have a relative yield of 40 basis points; $5.5 billion of 10-year securities have a spread of 75 basis points and $3 billion of 30-year bonds pay 100, said the person, who asked not to be identified, citing lack of authorization to speak about the offering.

Libor, the rate at which banks say they can borrow in dollars from each other, was set at 0.273 percent today.

While Apple’s $145 billion of cash is more than the combined funds of every AAA rated U.S. company including Microsoft, it failed to win the bond market’s highest credit grade from Moody’s Investors Service and Standard & Poor’s. Moody’s rated the firm Aa1 with S&P giving it a grade of AA+.

That rating tier is “inconsistent” with Apple’s credit risk, according to Fitch Ratings, which yesterday said the company’s “significant liquidity cushion” was overshadowed by the threat of volatile consumer preferences, significant competition and rapid technology changes. While Fitch hasn’t released a public grade for Apple, it said such a ranking would likely fall “at the highest end” of the single-A tier, lower than where Moody’s and S&P graded the debt.

Microsoft, along with Johnson & Johnson, Exxon Mobil Corp. and Automatic Data Processing Inc., is rated Aaa by Moody’s and AAA at S&P.

The world’s biggest software maker issued $1 billion of 10- year, 2.375 percent securities on April 25 to yield 70 basis points more than Treasuries, according to data compiled by Bloomberg. They traded yesterday at 100.2 cents on the dollar to yield 2.35 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Concern that Apple’s pace of sales growth is slowing were reinforced last week by a forecast for narrowing gross margins and sales this quarter that may miss analysts’ predictions by as much as $4.9 billion. Apple had its first profit decline in a decade last quarter amid accelerating competition in mobile devices from Samsung Electronics Co.

 

Returning Cash

Using new debt to finance Apple’s $55 billion addition to its plan to return cash to shareholders through 2015 with buybacks and dividends may require annual issuance of between $15 billion and $20 billion, Ping Zhao, an analyst at CreditSights Inc. in New York, wrote in a report April 23. Apple would probably receive a “very attractive rate” for as much as $50 billion in new debt, Barclays Plc analyst Ben Reitzes wrote in a report last month.

Apple’s debt sale is coming 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. Apple issued new convertible debt in 1996 that was called in 1999, Bloomberg data show.

Apple, which has had little need for Wall Street’s services since its 1980 initial public offering and the two bond deals in the 1990s, picked two underwriters with which it has had a deep history.

Goldman Sachs, which managed both bond deals in the 1990s, was hired by the company after last year’s shareholder meeting to help it improve transparency and governance, including what to do with its growing cash pile, according to people familiar with the decision. The bank has helped advise Apple’s board on ways to return cash to shareholders and respond to hedge fund manager David Einhorn, who began publicly demanding action, a person with knowledge of the plans said in February.

Goldman Sachs ranks first this year among managers of debt sales for technology companies, Bloomberg data show.

Deutsche Bank advised Apple on its 1997 takeover of Next Computer Inc., the deal that led to the return of Steve Jobs, Apple’s late co-founder.

While fees from managing the offering are probably small, the deal will carry prestige and size that can elevate underwriters in so-called league tables that Wall Street uses to claim bragging rights over peers, according to Jim Angel, a visiting professor at the University of Pennsylvania’s Wharton School.

“Whenever you have a very high-profile offering from a famous issuer that is a household name brand and it’s a big offering, everybody wants this because of the prestige angle,” Angel said. “The folks at Apple are no dummies, and I’m sure they’ll exploit their advantage to the maximum.”

 

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