Why Apple turned to bonds for fundraising

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apple-logo_100433916_m

apple-logo_100433916_mAt the beginning of February 2015, Apple raised more than $6 billion by selling bonds on Wall Street. So, did Apple need to raise that money by selling bonds? Honestly, probably not. However, companies need to raise cash, and one way to do that is to sell bonds, in addition to selling stock. And with bond rates low right now, and Apple at the center of debates over the way American companies stash billions in cash overseas to avoid paying taxes, it makes sense to look at a low-cost bond offering to raise some money. 

Low-cost money for AAPL

Many companies have multiple ways to get the capital they need to operate. They can borrow from banks and other entities. This money provides them with operating capital that can be used to create products to sell at a profit. As companies become profitable, they can use the money they raise from their business operations to repay debts and to fund their business. 

But there are other ways to raise money, such as offering ownership in their companies to the public, or by issuing bonds, as another way to raise money in a more public way. 

When issuing stock, investors purchase it initially through an IPO. There might be other offerings later on, but, for the most part, after the IPO, most of the buying and selling goes on in the secondary market. Investors can sell their shares on the secondary market (an exchange) and make money if shares of the company are highly valued. Investors owning stocks then have different rights (like voting on directors in some — but not all — cases), depending on what is offered by the company. Additionally, if a company decides to pay a dividend out of some of its profits, shareholders get a portion of that. 

Another way to raise money is to issue debt. Basically companies, ask for loans from the public. Bonds are a promise of payment at a set rate over a fixed term. A company like Apple can get away with paying a very low-interest rate on their bonds. The bond offering in February included rates as low as 1.55 percent on a five-year bond and 3.45 percent on a 30-year bond.

Can you imagine if you could borrow money for five years at 1.55 percent? I feel good that my car loan is at 1.99 percent. When you get a 30-year mortgage, there is a good chance that you’re paying more to borrow than Apple is. This is one way for Apple to raise billions of dollars without a high cost. By watching the bond market, Apple can put together a bond offering that doesn’t cost very much. Apple can use the money it has raised for some of the following general corporate purposes: 

  • Stock buybacks
  • Dividend payments
  • Acquisitions
  • Debt repayment (retire some of its higher-interest debts with this lower-interest debt)
  • Working capital

But why does Apple want to raise that money in the first place? The company is sitting on cash reserves of more than $175 billion. One of the problems facing Apple right now is that it is among the companies stashing more than $2 trillion overseas. Bringing that money back to the United States to meet its capital needs could very well cost Apple a great deal in terms of taxes. Raising money through a bond sale is a smart move, since paying the low interest on this debt will probably still cost less than paying what the company would owe in taxes. 

Consumers and corporate bonds 

Corporate bonds offer a chance for some consumers to get a little higher yield by investing in debt that is considered somewhat safe. A company like Apple has a very high rating, meaning that it is unlikely to default on its unsecured debt. Many investors like to include bonds in a diversified portfolio since it can add a measure of safety and stability (as long as you trust the company’s rating).

Many investors prefer government bonds, like Treasuries, because a government is generally considered more trustworthy (at least, there is still widespread faith in the ability of the United States government to honor its debt obligations). However, that safety comes with its own risk: low rates. The “safer” an investment is considered, the lower its return. 

At the time of the Apple bond offering in February, the five-year Treasury yield was 1.19 percent and the 30-year yield was 2.25 percent. Investing in an Apple bond is considered by many investors to be just safe as investing in US government debt, but it comes with a higher yield. Even during a recent government bond sell-off, the 30-year yield for a Treasury bond was lower than the 30-year rate Apple offered in February. Investors in long-term bonds can potentially earn a greater return when they focus on highly rated corporate debt than if they limit themselves to government debt.

Of course, with any investment there is always the risk of loss. Apple is doing well right now, and the company is flush with cash. However, that could change in the next 30 years, and you could lose out on a portion of your investment. As you consider where to put your money, carefully consider the options, and choose an investment plan that works with your situation and your risk tolerance.