Apple iBond Sale Shows Treasuries How to Take Advantage of the New Normal
Apple sold bonds worth US$17bn at the turn of the month, the largest such debt sale in history. In what was quickly dubbed the iBond, and constituted the tech giant’s first such offering since Steve Jobs revived the company in the mid-90s, the iPad and iPhone-maker raised enough capital on 30 April to finance a planned $100bn cash return to shareholders. It simultaneously avoided a large US tax bill, which it would have incurred had it repatriated its overseas cash back to its home country in the traditional manner, paying shareholders via its large cash reserve. The deal illustrates how treasurers are increasingly using corporate debt to raise finance, avoid tax and take advantage when attractive low interest rates are the ‘new normal’ post-crash.
Apple chief executive officer (CEO) Tim Cook made the debt sale move as the technology firm tries to appease shareholders unhappy with slowing sales and a share price that has lost 40% of its value since Steve Jobs’ retirement, and subsequent untimely death in October 2011. Increasing competition from Samsung in the smartphone space is depressing profits at the firm, which still made a healthy $9.5bn in profits last quarter but will struggle to regain the highs that it once achieved.
Apple’s vow to hand back money to shareholders in a buy-back plan running until the end of 2015 was the catalyst for the US debt sale. It was vastly oversubscribed and has enabled the firm to add another $55bn to the programme, taking it into $100bn triple figure territory; another record. What is interesting from a treasury perspective is that none of this is being financed by Apple’s existing $145bn cash reserve as the majority of is this is sited offshore; instead the firm choose to issue a bond to avoid US repatriation taxes and lock-in low interest financing.
Surging Corporate Bond Market
Apple is by no means the only company to be looking to its treasury to raise cheap finance via the corporate bond markets. Last month was the strongest period for April debt sales since 2008, topping $100bn after IBM raised $2.25bn, Texas Instruments $1bn, and Microsoft $2.67bn in US dollars (USD) and in euros – the first time the Windows manufacturer has turned to the European single currency.
April was only the second largest monthly debt market of the year after January 2013 saw a bumper US$137bn raised in offerings. The large sums were no doubt helped by the upswing in US merger and acquisition (M&A) activity at the turn of the year – some bank funded, some debt or private equity funded – which reflected an improvement in the US economic outlook and was led by Dell. The M&A activity continued with the large $28bn takeover of Heinz and deals involving US Airways/American, and others.
For treasurers the attraction of raising capital while interest rates are so low is obvious. In Apple’s case the manoeuvre was doubly attractive as it has such large cash reserves abroad, which would have attracted a 34% tax rate had it been repatriated back to the US. The technology giant has $145bn in cash on its books, with $102bn of that held overseas. Issuing US debt means it can finance the share buy-back programme without having to pay any repatriation taxes, while simultaneously shoring up CEO Cook’s position at the company.
Taking Advantage of Loose Monetary Policy
The US debt sale, made in six parts, was managed by Goldman Sachs and Deutsche Bank and was hugely attractive to investors, despite not really offering a drastically better return than miserly US Treasury bonds at the moment. Returns for investors are currently suffering due to the present loose monetary policy, which is depressing interest rates, but the power of Apple’s brand is such that it still proved alluring to investors, when they compared it to what was on offer elsewhere, causing them to throw money at the firm. Such bonds are also a useful ‘safe haven’ during risky times for treasurers and other investors looking to ‘park’ money.
The return from Apple is still better than most standard government bonds, which have flooded the market since the 2008 financial crisis, creating the ‘new normal’ loose monetary situation we have today, which promises to see entrenched low interest rates continuing for some time.
The six-part iBond debt offering from Apple, launched on 30 April, covered maturities of three, five, 10 and 30-year fixed rate bonds, alongside three and five-year floating rate notes. Investors are being paid 2.4% on Apple’s 10-year debt and 3.9% for the 30-year debt, which still outperforms many other long-term offerings at present. Additionally, fixed-rate debt such as this is proving attractive because inflation is beginning to fall in the US and Europe, taking away any possibility of interest rate rises in the short to medium-term.
Reaction and Analysis
Speaking to the ‘Guardian‘ newspaper, Michael Kastner, a principal at Halyard Asset Management in New York, said: “Corporations are likely to continue turning to the bond market to raise cash for as long as the US Federal Reserve keeps rates low.”
According to Craig Martin, treasury practice lead at the Association for Financial Professionals (AFP), it is fortunate for Apple that rates are so low. “As a former chief financial officer (CFO) myself, I have been saying for quite some time that in this environment treasurers and others should be looking to lock-in the benefits of financing on low returns, while the market is hungry for such corporate deals. I think investors will be satisfied with steady, safe and reliable low interest rate levels for some time and offer money up to corporates cheaply. The corporate bond strategy fits very well into any long term strategic plan.”
The sheer scale of the iBond is unlikely to be matched anytime soon as no other company is sitting on such vast cash reserves as Apple, lessening its relative pricing/risk attractiveness. Nonetheless, there will still be a strong buyers’ market for those treasurers at other multinational corporations (MNCs) that want to issue debt and raise finance. The ‘new normal’ market situation at the moment makes it inherently attractive and treasurers would be well advised to ‘make hay while the sun shines’ to borrow a favourite farming phrase.