Here’s Why Apple Is Offering $12B in Bonds

Source: Thinkstock

Source: Thinkstock

It appears Apple (NASDAQ:AAPL) is doing some nifty financial footwork to make sure it keeps its tax bill as low as possible. The tech giant issued $12 billion in bonds, which it plans to use for its shareholder return program. The announcement has investors on the bond market excited and analysts wondering why a company with $150 billion in cash would take on debt as opposed to tapping into its reserves.

Part of Apple’s plan is to bring share buybacks up to $90 billion from $60 billion, and raise dividends up to 8 percent, according to MarketWatch.  Since earnings have been reported and the buyback was announced, the stock itself has been driven up 13 percent. Seven different types of notes are to be issued, ranging in maturity from three years to thirty.

On top of this announcement, AppleInsider reports there are rumors flying about that the company will look to Europe for an additional $7 billion in bond offerings, taking advantage of low interest rates. Foreign debt markets are of particular interest to Apple as it would gives the company the chance to diversify its base and avoid saturating the American market due to the size of its sale. With bond ratings of double-A plus, Apple had no problem generating orders.

So what is the logic behind assuming more debt when Apple has so cash on hand?

The answer is that the vast majority of Apple’s $15o billion on hand is being held overseas. Repatriating that cash back to the United States would come with a monstrous tax bill. “Why not just pay from the enormous cash on hand? Because the cost of paying the dividend from cash on hand but held in overseas bank accounts would cost too much in the form of taxes. The borrowing rate for Apple is lower that the tax rate they’d pay,” Christopher Keith, senior vice president and fixed-income manager at Adviser Investments, told MarketWatch.

It’s hard to blame Apple for its decision, when the market is making available cheap rates and repatriation taxes are sure to be high. It also begs the question of whether or not Apple has big expansion plans overseas in the future, with significant cash holdings and a strong track record for growth.

This is the second big-time bond announcement Apple has made in the last year, following a $17 billion sale in 2013, which was the largest bond offering in corporate history at the time. With 88 percent of the company’s wealth being held internationally, don’t be surprised to see Apple take aggressive action in overseas markets.

With a reinvigorated shareholder base and rabid fan base, Apple might be in the perfect position to shake things up internationally.

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