Apple raises US$12bn in perfect style

Fri May 2, 2014 9:34am EDT

NEW YORK, May 2 (IFR) - Apple wielded the kind of marketing magic in the bond market that it is known for in the tech industry this week when it managed to convince US investors to buy US$12bn more of its bonds at premium prices, just a year after its US$17bn offering left hundreds of bondholders under water.

Despite grumblings from many institutional investors about the performance of its first deal, which had seen its longer-dated tranches plunge in price within weeks of issuance when rates spiked, Apple's lead managers Goldman Sachs and Deutsche Bank gathered a final book of US$35bn with orders from 1,600 investors.

The leads were able to tighten pricing across the seven tranches by 10bp-20bp from initial talk and still had a big enough US$41bn final book to lock in new-issue spreads that left little, if any, new-issue concession on the table.

It was as if the pain caused by the first deal had never occurred.

"The most interesting thing about this is that they repeated exactly the same pattern as last time - they're coming to market when spreads are tight, rates are at low and just before payroll numbers," said one banker not involved with the deal.

"But despite what happened the last time, they've convinced investors to buy bonds priced right on the screws. Again. It's incredible."

Some chalked it up to Apple simply being Apple. "When you are the biggest brand name in the world, you can name your price, especially in a market where the technicals are so strong," said one DCM head away from the deal.

Apple and the same underwriting pair as on the 2013 offering carefully managed expectations to ensure they could achieve the same kind of aggressive pricing as last time.

In the previous week, the tech giant prepped the market for a deal by announcing on its earnings call that it would look to return to the market with a similarly sized transaction as the last one, but this time in multiple currencies rather than just US dollars.

Investors calculated it would be looking for US$15bn-$20bn and could follow with another US$15bn after that without hurting its ratings. But those thoughts were tempered by news that it was putting a commercial paper programme of up to US$10bn in place, and there was no knowing how much it would end up issuing in other currencies.

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Investors' hurt on the first deal did try to push for some extra spread cushion to safeguard against any future rate volatility.

But that posturing was quietened to a large degree when Apple, exploiting the market's strong demand technicals, initially guided investors to expect only a US$8bn-$10bn transaction in dollars, spread across seven tranches and with the 30-year tranche capped at US$1bn.

The result was that its secondaries tightened on the day of pricing, to the point where its outstanding 2043s actually traded inside their original 100bp new-issue spread for the first time all year, going from 108bp over Treasuries at US$88 pre-announcement to 97bp at US$90.

When the book peaked at around US$41bn, Apple upped the size expectation to US$10bn-$12bn.

Ultimately, it priced US$1bn of three-year and US$1bn of five-year floating-rate notes; US$1.5bn of 1.05% three-year fixed notes at 18bp over Treasuries (from initial thoughts of plus 30bp area); US$2bn of 2.1% five-year notes at 37.5bp over (initially 50bp area); US$3bn of 2.85% seven-year notes at 60bp (initially 75bp area); US$2.5bn of 3.45% 10-year securities at 77bp (initially 90bp area) and US$1bn of 30-year bonds at 100bp (initially 115bp-120bp).

That pricing was after gathering final orders of US$1.8bn and US$1.9bn on the three and five-year floaters, and US$3.6bn, US$5.2bn, US$7.8bn, US$8.1bn and US$7bn respectively on the three, five, seven, 10 and 30-year fixed-rate tranches.

Like its first deal (at least initially), aftermarket performance was picture-perfect for the issuer, with the threes and fives rallying 1bp-3bp, and the seven-year notes - a first for Apple - by 5bp.

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In all, Apple pulled it off again, although whether it can do that a third time remains to be seen. The new 2024s and 2044s merely traded around their new-issue spread, largely because there were investors who saw better value in buying the equally liquid 2023s and 2043s at discount dollar prices.

Investors benchmarking performance to indices had to buy it to replicate the index weightings. But there were many who do not benchmark who find no incentive in buying the new bonds at current spreads.

"With the amount of debt they now have outstanding, there is no reason to step in and buy this name (at new issue)," said one investor.

"When we need credit on the fly we'll buy it, and when we need to dump credit on the fly, we'll sell it."

And there were those who still have not got over the bad taste left by Apple the first time around.

"The only reason Apple is out there with a bond today is because they see a great opportunity to exploit," said Bill Larkin, portfolio manager at Cabot Money Management."Everyone lost money the last time around and I'm guessing exactly the same thing will happen again." (Reporting by Danielle Robinson; Editing by Matthew Davies)

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