Why Apple Is Tapping The European Debt Market

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Apple (NASDAQ:AAPL) is tapping into the European debt markets for the first time, borrowing 2.8 billion Euros ($3.5 billion) via equal amounts of 8 year and 12 year bond offerings. ((Apple SEC Filing)) Apple has a massive cash balance – standing at $155 billion as of the last quarter – and is seeing increasingly strong free cash flows – over $10 billion during FY Q4 – on the back of hit new products such as the iPhone 6. However, the move to issue Euro-denominated debt makes a lot of sense for Apple given the low interest rate environment in Europe and the company’s need to fund its shareholder returns without repatriating its overseas cash.

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Why Apple Is Issuing Euro Denominated Debt

The interest rates that Apple has been able to realize on the debt offerings are extremely low, with the 8 year bond priced to yield 1.082% while the 12 year bond will yield 1.671%. This compares to a borrowing rate of around 2.4% on the company’s $5.5 billion 10 year bonds in the U.S. issued last year. The lower borrowing costs are largely attributable to the difference between the underlying interest rates in the E.U. and U.S. For instance, 10-year U.S. Treasuries currently have a yield of above 2.3%, while German bonds with a comparable maturity have yields of under 0.9%. [1] Additionally, Apple’s strong credit ratings and widely recognized brand could have also resulted in strong demand for the issue in the European markets, allowing the company to offer lower yields. In addition to the lower rates, borrowing from Europe should allow Apple to diversify its base of debt investors geographically, without being overly dependent on the North American debt markets. The strengthening of the U.S. dollar against the Euro could also be a factor behind the company’s decision. While this bond issue is small in comparison to the company’s previous issues in the U.S. market, there is a possibility that the company could be testing the waters before making a larger sale.

Taking On Debt Is More Tax-Efficient For Apple

Apple initiated its shareholder returns program in 2012 and has been steadily bolstering its share repurchases and dividends. The company has authorized a $90 billion share buyback program, and had repurchased about $68 billion worth of shares as of September. Apple also raised its quarterly dividend by about 8% earlier this year to $0.47 per share. This has meant that the company’s total capital return program has increased to about $130 billion, and the company may need more cash to fund the program given that a bulk of its cash reserves are located overseas. Over 85% of of Apple’s cash reserves are held with its overseas subsidiaries, and the company would face repatriation taxes if it were to bring the funds back to the United States, which would be very tax-inefficient. [2] The company has been steadily increasing its debt load to fund its shareholder returns. Raising debt to repurchase shares is also attractive from a cash flow perspective, since the company’s borrowing costs (for the European issue) are lower than its  trailing dividend yield, which stands at over 1.7%. Additionally, since interest payments are tax deductible, the company would be able to potentially lower its tax burden.

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Notes:
  1. Daily Treasury Yield Curve Rates, U.S. Department of the Treasury []
  2. Why Apple Inc looks less risky than U.S. treasuries, Financial Post, November 2014 []