The first stage of Apple’s plan to spend $100 billion in share buy-backs and increased dividends was completed yesterday as Apple sold $17 billion’s worth of corporate bonds – the world’s largest corporate debt sale.
Although Apple has a cash balance of $145b, much of this money is held in overseas subsidiaries, and Apple would have to pay tax on it to bring it back to the USA. It is cheaper for it to borrow the money instead …
Unsurprisingly, demand was high, with the Financial Times reporting that demand for the bond reached $52b.
“Investors are always looking for names which they don’t already have exposure to. When you see a new high-quality issuer like Apple, that gets people’s attention.” Jay Mueller, portfolio manager at Wells Capital.
“As a bond investor you don’t want to buy debt which is being used to fund share buybacks, but in the case of Apple, it’s a drop in the ocean compared to the size of their overall cash holdings,” said Michael Kastner, principal at Halyard Asset Management.
That confidence in Apple’s ability to easily repay the debt was reflected in the extremely low cost of the debt.
The three-year fixed tranche priced at 20 basis points over the benchmark Treasury yield, with the five-year bond at 40bp, the 10-year at 75bp, and the 30-year at 100bp. All fixed tranches came in tighter than levels where bankers were pitching the bonds earlier on Tuesday. The 3- and 5-year floating rate tranches were sold at 5bp and 25bp over the London Interbank Offered Rate, respectively.
A basis point is 0.01%, so Apple will pay rates ranging from 0.45 percent per year on a three-year bond to 3.85 percent on a 30-year bond.