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Apple Raises $7 Billion with Debt Issuance

Sep 5, 2019
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Apple (NASDAQ:AAPL) took advantage of record low interest rates to issue debt today in an infrequent capital raise (its first since 2017). Demand for Apple's debt was high and as market watchers will know, when bond supply is limited and demand is high, that drives down the coupon which will be paid on the bond with yields only going as high as 103 basis points above the equivalent US Treasury Notes for 30 year debt.

Initially, Apple's bankers were only looking to sell $4 or $5 billion of debt but as orders for it piled in amounting up to $25 billion, Apple increased the allocation in light of the demand to get more cash as well as take advantage of the over subscription to push the yield they would have to pay on the debt down. Considering high grade corporate debt yields more around 5 - 6% at the moment, Apple's done well.

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Why on Earth is Apple BORROWING??

Apple has huge cash reserves, over $50 billion at last count and many billions more in securities. What's it borrowing now for then?? Well, it's a variety of reasons actually but all very staid and boring ones including:

  • Paying off previous debt and effectively rolling it into a lower rate loan.
  • Buying back stock.
  • Paying dividends to shareholders.
  • Working capital and general corporate purposes.

So basically Apple is doing the corporate version of what we in the UK refer to as credit card tarting - switching credit cards from a credit card with a higher interest rate to one with a lower interest rate. But there's more going on than just that, with two of these uses going towards further enriching Apple's stockholders pumping up the share price with additional demand from stock buybacks as well as paying out dividends.

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The thing is that with interest rates so low and so much demand for high quality debt in the world (there's over $17 trillion of negative yielding debt around the world), it entirely makes sense for companies to borrow what they can while the going is good. This is the other end of the scale from what we've also seen recently but it is slightly rarer than the rush to IPO we've seen over the last year or so with companies desperately trying to raise cash before any recession materialises (we're probably overdue one considering we're still in one of the longest bull market runs and periods of economic growth in history), and valuations collapse.

As we've seen with the recent non-stellar performance of IPOs like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT), the rush to raise capital from the markets is on. However, somewhat unusually at this stage of the economic cycle (10 years of growth!), global interest rates are still at historic lows which means that it's not just private companies which can take advantage of capital raising. Corporate debt in the US stands at over $15 trillion, while household debt sits over $13 trillion.

Given US GDP is about $20 trillion, that's quite a lot of leverage sitting out there in the market and concerns around the affordability of maintaining that in the event of a recession and possible lowering of the amount of cash available means the ability of companies and individuals to roll that as payments become due could become limited. That much said, Apple is unlikely to run into trouble raising cash (should it actually have a genuine need to do so during a recession).

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Borrowing because you can probably get a better return on the cash you've borrowed than you'll need to pay by doing nothing other than some rejigging with corporate operations and share buybacks etc, not investing in new R&D, products or services feels like an inefficiency but with interest rates this low, it makes sense. Of course we'd rather see cash like this going to companies with innovative ideas that will change the world and grow new businesses, creating new jobs but we take what we can get.

The market has priced in further Fed rate cuts this year so it may have been that Apple could've raised the cash even cheaper, although getting straight into the market in September when everything is back in full swing after the summer break also makes sense and Apple isn't the only company which will likely be issuing debt this month so it also makes sense to get in early before funds looking for high grade debt splash the cash on other companies and perhaps wouldn't have oversubscribed so much.

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