- Company borrows $8.5 billion in new offering.
- Interest rates down significantly from last year.
- Buyback to continue for quite a while.
One of the major impacts of the coronavirus can be found in global bond markets. Interest rates have plunged to near zero in the US, while a number of countries around the globe have negative rates. For some companies, this is a time to take advantage of the situation, and technology giant Apple (NASDAQ:AAPL) did just that this week.
On Monday, it was reported that Apple was among a handful of companies looking to tap the debt markets. It turned out that the company was doing a four-part deal, with maturities ranging from 3 to 30 years. In the table below, you can see the key items from this deal compared against Apple's previous large dollar-denominated debt deal from September 2019.
The biggest difference can be found at the short end of the curve, where Apple paid almost 100 basis points less for 3-year debt, despite this part of the deal being twice the size of the previous offering. While savings at the long end weren't as much, Apple was still able to pay 30 basis points less despite this part containing an extra billion for this part of the borrowing.
In total, Apple was able to borrow $8.5 billion this time around, compared to $7 billion in September 2019. Despite the larger offering, total annual interest on this week's deal was just over $135 million, compared to more than $154 million in last year's deal. That nearly $19 million less in interest means that the weighted average coupon this time around was 1.59%, more than 60 basis points below the 2.20% seen last year.
So what are the potential uses for these funds? Well, Apple does have some short-term debt coming due soon. As the 10-Q filing details, there was over $20 billion in debt and commercial paper (plus a repurchase agreement) due in the next 12 months. Some of these newly borrowed funds will likely be used for refinancing, as the company is now seeing maturities of some of the debts it took on to help with the capital return plan over the past 5-8 years.
On the other hand, Apple could be using these borrowings to reward shareholders. When looking at that capital return plan, you can find Apple's latest update in the graphic below. At last week's earnings report, the company announced both a dividend and buyback raise. Management still has a long way to go to get to its cash-neutral balance sheet target. Over $90 billion has been spent on capital returns in the last four quarters, yet the net cash balance is only down by $30 billion. That shows how great Apple's cash flow production is.
(Source: Apple capital return page, seen here)
In Tuesday morning trade, Apple shares are approaching $300 again, and they sit just about 10% away from their all-time high. With the large revenue and earnings beat announced last week, most analysts have raised their price targets recently. The two analysts that actually cut their targets still think the stock is going much higher as well. While the coronavirus situation is hurting results in the short term, investors are mostly looking at the long-term strength of the company's product and service ecosystem.
In the end, Apple got a tremendous deal with its latest bond offering. Despite raising an extra billion and a half dollars, more than 21% more than last year's offering, the company is paying 12.2% less in annual interest on a dollar basis. Whether it be for refinancing of previous debts or to help with the capital return plan, investors should be thrilled that the technology giant was able to use its financial might to its advantage yet again.
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