April 30, 2013 — -- Apple Inc. [NASDAQ: AAPL] today revealed details of the largest nonfinancial debt deal ever, but should retail investors buy a piece of the tech giant's $17 billion bond offer?
The new debt is rated AA-plus by credit rating company Standard & Poor's, the same rating for U.S. Treasuries. Moody's Investors Service rated it Aa1, instead of its highest stamp of Aaa. Moody's has given U.S. Treasuries the highest rating, but with a negative outlook.
The Cupertino, Calif.-based iPad and iPhone maker is offering six types of bonds with different time horizons from three- to 30 years, two of which are floating.
For the short-term bonds, the yields for Apple are slightly higher than those of U.S. Treasuries, but Jody Lurie, corporate credit analyst at Janney Capital Markets, said that doesn't mean retail investors should ask their brokers to invest in Apple bonds in the secondary market.
Apple is taking advantage of record-low rates, in other words, borrowing cheaply to raise money while it keeps its giant cash hoard. The company's cash balance at the end of its second quarter is $145 billion, said Apple chief financial officer Peter Oppenheimer last week.
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Investors have nagged Apple's leadership over its cash pile, much of which is abroad and would be subject to higher tax rates if repatriated.
The bond offering has generated more than $50 billion in new orders from institutional investors, according to people familiar with the matter, the Wall Street Journal reported.
A spokesman for Apple said the company will release a term sheet in the near future with additional financial details. The company will return $100 billion to Apple shareholders by the end of 2015.
"Other than the Apple name, retail investors want the yield, like coupons with fixed income," she said. "To buy a three-year bond, giving you a coupon not much more attractive than U.S. Treasuries is a really hard sell."
In addition, paying a broker a commission will eat into a retail investor's return, diminishing the yield further. Investors should also keep in mind that, as with all individual bonds, the Apple bonds will trade for more or less than their face value once they hit the market, so if you want to cash them in before maturity you may not get all your investment back--or you may get a bonus.
Lurie said most retail investors would be better off investing in Apple stock, especially with the company's recent stock-repurchase program and dividend announcement.
Last week, Apple announced higher-than-expected second-quarter earnings while announcing it is expanding its stock buyback program to $60 billion, up $10 billion.
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Investors are more optimistic about the company's stock than in previous months. On Tuesday afternoon, shares of Apple rose to $443.02, up 3 percent, after consistently trading below its 50-day moving average for the last several weeks.
Michael Hodel, associate director, credit research with Morningstar Inc. said Apple bonds were not necessarily an alternative to U.S. Treasuries, which have the same credit rating.
"I would not view Apple bonds as safer than U.S. Treasuries, but Apple is clearly a very financially healthy firm that should be able to borrow at rates nearly as low as those that the U.S. Treasury enjoys," Hodel said.
While it is true that Apple's balance sheet is in better shape than that of the U.S. Treasury, the major difference between the two entities, Hodel said, is that the Treasury is ultimately backed by the power to tax the entire U.S. economy rather than the sale of fairly limited range of products.
"In other words, the U.S. government is almost certainly going to be around 10, 20, or 30 years from now. The certainty around Apple's business is somewhat lower," he said. "In addition, the U.S. can print dollars should it face a liquidity crunch. Apple doesn't share this luxury."
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