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Investors throw $52 billion at Apple, are Apple bonds a good investment?

Karen Haslam | May 3, 2013
Despite having $145 billion in the bank, Apple has decided to reach out to the debt market to offer $17 billion in bonds in order to pay money back to investors. Why would Apple need to go to such lengths and what does it mean to investors? We answer your questions.

Despite having $145 billion in the bank, Apple has decided to reach out to the debt market to offer $17 billion in bonds in order to pay money back to investors. Why would Apple need to go to such lengths and what does it mean to investors? We answer your questions.

What is Apple borrowing money for?

When it announced its financial results last week, Apple also revealed a plan to return $100 billion to shareholders by the end of 2015. A year previously Apple had said it would pay $45 billion in dividend payments and share buybacks by the end of 2015, so this is more than double that previous plan. Apple is borrowing money to help it pay money back to shareholders.

Doesn't Apple have a ton of money already, why does it need to go into debt?

Even though Apple has a whopping $145 billion in cash, only $45 billion of it is located in the US, explains Reuters. This means Apple has two choices: it can bring some of its cash back into the US, and pay 35% tax on it; or it can raise $60 billion worth of cash by issuing these bonds.

Given that Apple would lose more than a third to tax if it repatriated the money, it makes more sense for the company to take advantage of what are historically low interest rates on corporate debt, backed by international cash reserves.

Bond interest rates are typically attached to the rates of US Treasury Notes, and they are trading at near 10-year lows. "In short, it's rarely this cheap and easy to get your hands on fresh loans", explains Ars Technica.

What rate of interest is Apple getting?

According to the Wall Street Journal, Apple has been able to borrow at rates nearly as low as the highest-rated triple-A firms in the world. "It borrowed $5.5 billion for 10 years at an annual yield of 2.415%. It also issued three-year debt at 0.511%, five-year debt at 1.076% and 30-year debt at 3.883%. And Apple sold floating-rate bonds that mature in three and five years at rates of 0.05 and 0.25 percentage point over the three-month London interbank offered rate, an industry benchmark," states that report.

Why isn't Apple getting AAA rates?

Apple's debt has been rated at AA-plus by Standard & Poor's Ratings Services and Aa1 by Moody's. It's just shy of the triple-A rating which companies like Microsoft, Exxon Mobil, Automatic Data Processing, and Johnson & Johnson. Why did Apple not get a AAA credit rating? S&P said its rating reflects the expectation Apple will maintain "excellent liquidity and significant net cash," while Moody's blamed Apple's imperfect rating the "highly volatile industry" and the fact that it needs to raise $50 billion over the next five or six years, writes Bloomberg.

 

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