BREAKINGVIEWS - Apple, Fed and IRS conspire to set debt records

Wed May 1, 2013 11:44am IST

The Apple logo hangs inside the glass entrance to the Apple Store on 5th Avenue in New York City, April 4, 2013. REUTERS/Mike Segar/Files

The Apple logo hangs inside the glass entrance to the Apple Store on 5th Avenue in New York City, April 4, 2013.

Credit: Reuters/Mike Segar/Files

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Richard Beales

NEW YORK (Reuters Breakingviews) - Apple(AAPL.O) is breaking new ground again - but this time in finance. The iPhone and iPad maker launched a giant bond issue on Tuesday and may borrow well over $15 billion, the most in one shot by any non-bank ever. The bonds could also carry record low pricing. Eager investors should be alert to the perfect storm behind the deal.

It's a kind of conspiracy involving Apple's novelty in the market, the Federal Reserve's ultra-low interest rates and the Internal Revenue Service's habit of taxing overseas profits that U.S. companies bring home. Apple is selling three and five-year floating-rate debt as well as three, five, 10 and 30-year fixed-rate bonds.

The company missed by just one notch a AAA rating from both Standard & Poor's and Moody's Investors Service. The agencies' concern is that fickle consumers and technological disruption could dent Apple's competitive position. Fitch Ratings said its grade would have been lower had it provided one, considering the humbling of former tech high-fliers Sony (6758.T), Nokia (NOK1V.HE) and Motorola Mobility.

But with $145 billion of cash and billions more flowing in every quarter, Apple is stirring intense interest in its debt, with orders topping $40 billion by mid-morning in New York, according to IFR. If the company ends up issuing $20 billion, spread evenly across all six parts, the annual interest bill could run to some $330 million at the early price levels reported by IFR, which will probably drop. Apple's roughly $60 billion of annual earnings before interest and tax would cover interest plus existing interest-like charges well over 100 times.

In its quest to return $100 billion to shareholders by the end of 2015 while avoiding tax on repatriating cash, Apple could borrow as much again next year and the year after. That would turn it into a debt market touchstone without endangering its balance sheet. Add benchmark rates that have fallen even since Microsoft (MSFT.O) sold debt last week, and Apple's bonds may set new record lows for yields, at least relative to the underlying benchmarks.

The company has captured for its debt launch some of the hype it generates when unveiling new gizmos. Yet with little room in the pricing, buyers of longer-dated bonds stand to lose money if rates go up. And the competitive danger highlighted by Fitch, while seemingly remote, is real. As a debt investment, Apple may prove reasonably healthy but not especially satisfying.

CONTEXT NEWS

- Apple on April 30 opened order books on a six-part all-dollar bond offering, which could turn out to be the largest non-bank debt sale in history. The U.S. iPhone and iPad maker is issuing bonds to help fund its plan to return $100 billion in capital to shareholders by the end of 2015.

- Apple is planning to offer three-year and five-year fixed and floating-rate notes, as well as 10-year and 30-year fixed-rate notes via Goldman Sachs and Deutsche Bank.

- Sources told IFR that investors, in what is known as a reverse inquiry, had asked for Apple to issue at least $5 billion to $6 billion in debt, but that the company in fact plans to issue $15 billion or more, which would be the largest bond sale ever by a non-financial institution.

- Apple prospectus and supplement: link.reuters.com/bek77t and link.reuters.com/cek77t

(Editing by Reynolds Holding and Martin Langfield)

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