Why companies rack up debt: Apple's bond sale

[c1ue]

This is interesting - and not a knock on Apple specifically.

It seems instructive, however, on why corporations have more debt than ever despite also bringing in more revenue than ever...

http://www.theregister.co.uk/2013/04...le_bond_issue/

Apple has embarked on one of the biggest bond offerings in history as part of a ploy to avoid tax.
Cupertino will soon begin issuing bonds in what will be one of the biggest debt sales of all time, it announced today. The plan is part of a scheme to funnel cash back to investors over the next three years.

After its stock price fell to dismal lows of sub-$400 last week, Apple promised to return up to $100bn to shareholders by starting up a share-buyback programme and paying out increased dividends.

Reports have suggested the total size of the bond issue could soar up to $16bn, which has never been matched by any other non-bank bond sale in America.

The move is surprising because Cupertino has no debt and is currently riding high on cash reserves thought to be worth around $145bn.

However, as an estimated $100bn of these reserves is locked up overseas, Apple would have to pay 35 per cent tax to repatriate it. It is cheaper for Cupertino to borrow the cash from the markets and pay interest on it, than to repatriate its cash from overseas and pay the resultant swingeing taxes.

The bonds will be issued through Goldman Sachs as well as Deutsche Bank and demand is likely to be very high.

"The market is going to be all over it," said Todd Duvick, corporate credit analyst at Stifel Nicolaus. "It's a name that everyone follows and they're comfortable with. From a credit perspective it's going to be a good diversification name for a lot of accounts."

Bonds will mature in either 2016 and 2018 for the floating rate notes, or 2016, 2018, 2023 and 2043 for the fixed rate notes.

Read Apple’s announcement here.

[GRG55]

Re: Why companies rack up debt: Apple's bond sale

This is interesting - and not a knock on Apple specifically.

It seems instructive, however, on why corporations have more debt than ever despite also bringing in more revenue than ever...

http://www.theregister.co.uk/2013/04...le_bond_issue/

Corporations got a one time tax break on repatriations of capital some years ago (I think during the Bush Jr. administration). If this administration can find the political cover they may do that again as a means to goose the USA economy (put some strings on the tax holiday related to domestic capex investment of the funds).

Otherwise, I think the reason corporations (on a broad basis that is not being covered by the media) are floating debt now is because they know there is going to be another slowdown/recession and it is better to be cashed up with low interest long term debt on the balance sheet BEFORE that happens...

[dcarrigg]

Re: Why companies rack up debt: Apple's bond sale

This is interesting - and not a knock on Apple specifically.

It seems instructive, however, on why corporations have more debt than ever despite also bringing in more revenue than ever...

http://www.theregister.co.uk/2013/04...le_bond_issue/

Yeah. Tax havens were one thing when they were just for scoundrels. Now they're for top mainstream companies. It's a worldwide problem, and it really needs to be dealt with. It's not like Apple made the $100B overseas. Most of it was made right here in America. But they float it out of the country to dodge taxes. Then they'd rather pay the Goldman tax of 2% and another 2% out to corporate bond investors than pay the tax man what's due.

It's so flagrant they mention it publicly. But nothing is done about it.

[lektrode]

Re: Why companies rack up debt: Apple's bond sale

.....the reason corporations (on a broad basis that is not being covered by the media) are floating debt now is because they know there is going to be another slowdown/recession and it is better to be cashed up with low interest long term debt on the balance sheet BEFORE that happens...

as i recall, that strategy was credited to ford saving its ass - along with its shareholders?

am wondren just how badly that apple bond buyers will get screwed, as the squid&co frontruns this one....

[lektrode]

Re: Why companies rack up debt: Apple's bond sale

.....It's so flagrant they mention it publicly. But nothing is done about it.

well.. not when 'from 40000feet nothing looks illegal' - mights well jump on the bandwagon, eh?

[ProdigyofZen]

Re: Why companies rack up debt: Apple's bond sale

well.. not when 'from 40000feet nothing looks illegal' - mights well jump on the bandwagon, eh?

Humans can rationalize anything. I remember reading about James Matheson (of JardineMatheson fame) and how he wrote in his papers/journals that "We the JardineMatheson company are doing the correct thing in fostering trade in China, we are not pirates but honest merchants making a profit"

He was referring to the sale of Opium to the Chinese illegally after the Chinese outlawed it.

[don]

Re: Why companies rack up debt: Apple's bond sale

Humans can rationalize anything. I remember reading about James Matheson (of JardineMatheson fame) and how he wrote in his papers/journals that "We the JardineMatheson company are doing the correct thing in fostering trade in China, we are not pirates but honest merchants making a profit"

He was referring to the sale of Opium to the Chinese illegally after the Chinese outlawed it.

and fought two unsuccessful wars to block it . . . . but hey, it worked wonders for England's triangular trade . . . .

[ProdigyofZen]

Re: Why companies rack up debt: Apple's bond sale

and fought two unsuccessful wars to block it . . . . but hey, it worked wonders for England's triangular trade . . . .

Fighting the British navy in the early to mid 1800's was a no win situation for anyone including the Chinese.

I think FDR must have felt guilty that his grandfather made so much money selling Opium to the Chinese....

[GRG55]

Re: Why companies rack up debt: Apple's bond sale

...I think FDR must have felt guilty that his grandfather made so much money selling Opium to the Chinese....

I seriously doubt it...

[jabberwocky]

Re: Why companies rack up debt: Apple's bond sale

Corporations got a one time tax break on repatriations of capital some years ago (I think during the Bush Jr. administration). If this administration can find the political cover they may do that again as a means to goose the USA economy (put some strings on the tax holiday related to domestic capex investment of the funds).

Otherwise, I think the reason corporations (on a broad basis that is not being covered by the media) are floating debt now is because they know there is going to be another slowdown/recession and it is better to be cashed up with low interest long term debt on the balance sheet BEFORE that happens...

This might apply, but are they not buying back shares with borrowed money, and further enriching management, at the exspense of investment and regular shareholder value in the long run? This looks like typical financial engineering to me, but perhaps I am too ctnical. It does seem to me that a lot of tech companies have enormously benefitted insiders as their companies gradually weakened.

[GRG55]

Re: Why companies rack up debt: Apple's bond sale

This might apply, but are they not buying back shares with borrowed money, and further enriching management, at the exspense of investment and regular shareholder value in the long run? This looks like typical financial engineering to me, but perhaps I am too ctnical. It does seem to me that a lot of tech companies have enormously benefitted insiders as their companies gradually weakened.

The stock buy-back is a gross generalization that is not indicative of the majority of the thousands of firms in the USA and Canada. No doubt there is financial engineering happening...we all spent a long time building up a FIRE economy; it's not going to disappear quickly or completely one suspects. So we still see this sort of stuff going on:

US hedge fund faces challenge in Tim Hortons shakeup bid

Wed May 1, 2013 5:38pm EDT

* Activist shareholder pushes for debt-funded share buyback...

...TORONTO/NEW YORK, May 1 (Reuters) - Highfields Capital, a U.S. hedge fund agitating for change at Tim Hortons Inc , may have a hard time convincing institutional investors that the chain that says it sells eight out of every 10 cups of coffee in Canada needs a wake-up call.

The Boston-based activist investor, with an about 4 percent stake in the company, wants Tim Hortons to boost shareholder returns by taking on new debt to buy back its stock.

It is also pushing Tim Hortons to scale back its U.S. expansion and focus more closely on its thriving Canadian business. The fund, which also outlined a second tier list of demands, wants Tims to spin off or sell its distribution business, create a real estate investment trust to house its property assets and bring in new directors with more financial experience...

...But the proposals may not be so easy to sell to long-term investors, according to some money managers and investors.

"This business ain't broke and needs no fixin'," said Barry Schwartz, a portfolio manager at Baskin Financial, which owns roughly 130,000 shares in Tim Hortons, according to Thomson Reuters data.

"The company is shareholder-friendly and has rewarded long-term investors with rising dividends and share buybacks, plus the stock performance since the IPO has been terrific," he said...

But unlike what the hedgies and self-indulgent management want to do with a few high profile firms most businesses have to be run on a pretty sound financial footing or they don't survive. Not many can expect a bailout from the generous taxpayers...

[don]

Re: Why companies rack up debt: Apple's bond sale

Fighting the British navy in the early to mid 1800's was a no win situation for anyone including the Chinese.

Are you suggesting the Chinese shouldn't have defended thwemselves? And if they hadn't, would they only have themselves to blame. Great White Father, tell us the path to choose . . . .

[charliebrown]

Re: Why companies rack up debt: Apple's bond sale

Being a finance novice ...

Apple is buying 16B to pay out a dividend and buy back stock.

Last year apple made 55B EBITA. So 16B should not be very hard to service.
If earnings get kicked of course, the debt gets harder and harder to service.

At least the stock is low, so maybe .... its a good idea. Or do the top brass know that the apple new idea well is dry, and earnings are going to trend down now
and this is a last ditch effort to shore up the stock price while the insiders bail? Or does someone figure this is going to be a nadir for intrest rates for Apple
so borrow now?

What about IBM's buy back??? 5B on an EBITA of 22B and they already have 43B of liabilities. However maybe they could roll debt maybe borrow cheap and long to retire existing debt?? don't know.

[ProdigyofZen]

Re: Why companies rack up debt: Apple's bond sale

Are you suggesting the Chinese shouldn't have defended thwemselves? And if they hadn't, would they only have themselves to blame. Great White Father, tell us the path to choose . . . .

Wow don, seems like you did a lot of extrapolation there. I was simply stating that the British navy was a powerhouse in that time frame regardless of race/ethnicity.

I am hoping that was a bit of sarcasm on your part.

[jabberwocky]

Re: Why companies rack up debt: Apple's bond sale

With respect, I do not believe that I made a "gross generalization", but referred to a common practice in publicly traded corporations, of payment to management in stock options, since the early 90's, precipitated, if I recall, by changes in taxation that made cash payments above a certain level ($1,000,000) non-deductable. The ratio of average worker to CEO pay has become grotesque. I am of the opinion that a Gresham's dynamic in pay disdtribution has resulted in a level of sociopathy in management that is more marked than you may believe.
I fully respect that your opinion carries much more weight than mine. I have learned much from you, GRG55. I suspect that we may disagree on this.