Apple may need to make its iOUs as desirable as iPhones.
Right now, money managers are gaga for the company’s bonds even before they have made their market debut. But the scale of issuance that could come from the tech giant is on a par with huge borrowers like banks. To be sustainable, that would call for some of Apple’s magic.
Debt from cash-rich U.S. technology companies used to be exceedingly rare. But low interest rates have changed that. Borrowing cheaply is a better financial bet than repatriating cash earned overseas and paying tax on it. Microsoft tested the waters in 2009 and has raised nearly $15 billion since then, according to Thomson Reuters data.
But Apple could be looking to borrow more than that every year. The company recently expanded its budget for dividends and stock buybacks to $100 billion by the end of 2015. Assuming $45 billion of its cash pile is onshore - a figure consistent with what the company has said - and ignoring new inflows, that means borrowing $55 billion in less than three years, according to research firm CreditSights, or nearly $20 billion a year.
That would put Apple in the same issuance ballpark as large banks like Bank of America and Citigroup and other big financial firms. And many of those are mostly refinancing old debt. The iPhone maker would be asking more of investors since it would be looking for new money each time.
Most companies would have to pay lenders a premium to borrow so much. Apple is different, and not just because fixed-income fund managers may want to feel like the cool kids for once. A company with lots of cash, even if it’s trapped overseas, is a godsend for those who simply don’t want to worry about default. Apple has garnered a AA-plus rating from Standard & Poor’s, one notch down from AAA. Microsoft, a rare top-rated company, will pay less than 2.5 percent interest on the $1 billion of 10-year bonds it sold on Thursday.
If its bonds keep on marching to market, however, Apple’s novelty as a borrower will wear off and the company will need to keep investors engaged. Innovation could help. Just as Apple visionary Steve Jobs seemingly knew what people wanted before they did, the company may be able to use its brand and perhaps innovative structures to create a category of bonds investors suddenly can’t do without. If Apple manages it right, iOUs could be the next big thing.
Agnes T. Crane is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
