Apple Gets Ready For Second Huge Bond Sale

Source: Getty Images

Source: Getty Images

Soon after Apple (NASDAQ:AAPL) announced its stronger-than-expected March quarter financial results, the Cupertino-based company also revealed that it planned to boost its share repurchase program from $60 billion to $90 billion. According to Apple vice president of finance and corporate controller Luca Maestri, this stock buyback expansion will be funded by another bond sale.

“To execute our updated capital return program in a tax efficient manner and leverage our very strong balance sheet, we intend to access the debt markets again,” stated Maestri according to a transcript of Apple’s fiscal second quarter earnings call provided by Morningstar. “We plan to be active in both the domestic and international bond markets during 2014 for an amount of term debt financing similar to what we issued in 2013, with a breakdown between markets, currencies and tenures to be determined over the course of the year, and subject to prevailing conditions in each market.”

As noted by the Financial Times, Apple’s $17 billion bond offering made last year was the world’s largest corporate debt sale at the time. While Apple ended the March quarter with a substantial cash pile of $150.6 billion, about $132 billion, or 88 percent, of that cash is held offshore. Maestri noted that “under current U.S. tax law, we would incur significant cash tax consequences” if the company repatriated its foreign cash reserves.

In this case, the phrase “significant tax consequences” may be an understatement.  If Apple returned its overseas cash hoard to America’s shores, it would lose at least 35 percent of its cash in taxes under the current federal corporate tax rate.

According to data provided by the non-partisan Tax Foundation, the U.S. has the highest corporate income tax rate of the thirty-three countries that make up the Organization for Economic Cooperation and Development (OECD). Not surprisingly, Apple directs most of its overseas profits through multiple subsidiaries based in Ireland, the country with the lowest corporate income tax rate in the OECD at 12.5 percent. “We continue to advocate for comprehensive corporate tax reform and streamlining the tax code which we believe would be of great benefit to the U.S. economy,” stated Maestri, according to Morningstar.

For this reason, Apple is preparing for another large debt sale “similar to what we issued in 2013,”or $17 billion. As noted by the Financial Times, Apple is able to borrow such large amounts thanks to its double A credit rating and large cash holdings. Although another Apple bond offering would likely be welcomed by investors, it should be noted that investors who bought into Apple’s long-term bonds last year have taken a loss.

According to the Financial Times, Apple’s thirty-year bonds are trading at 90.36 cents on the dollar for a yield of 4.45 percent, from a peak of 101.97 last May. However, it appears that Apple’s long-term bond buyers were simply the victims of unfortunate timing, since the dropping value of the bonds was initiated by indications that the Federal Reserve was planning on tapering its stimulus efforts. Apple’s longer-term bonds have sustained most of the value loss since they are the most susceptible to changes in the interest rates. The majority of last year’s bond sale was handled by Goldman Sachs (NYSE:GS) while Deutsche Bank handled the second-largest portion of the deal. It is likely that Apple would use the same underwriting partners for its second large bond sale.

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