NEW YORK, May 3 (IFR) - Years of badgering Apple to consider the virtues of taking on debt finally paid off for the investment banking industry last week - and for two banks in particular - when the world leader in consumer technology innovations issued a record-breaking US$17bn of bonds.
The industry has for years been trying to convince Aa1/AA+ rated Apple to join the rest of the world's major tech companies and take debt on to its books.
After seeing scores of other companies issue debt to fund share buybacks, with little impact to their funding costs or ratings, Apple is believed to have mandated Goldman Sachs in January to lay the documentation and ratings groundwork for a deal, the proceeds of which were to help to fund a US$100bn capital reward for shareholders, including a US$60bn share buyback over the next three years.
The decision to come to market coincided with signs that some of Apple's business segments were maturing, as well as the fact that, with central banks flooding the market with liquidity, record-low funding costs made issuing debt a tantalising alternative to dipping into its US$145bn of cash, about US$102bn of which is held offshore.
Being Apple, the deal wasn't exactly hard to sell.
"Apple made its intentions clear that this deal is for shareholder-friendly activity, but they have tremendous metrics and brand recognition," said Rajeev Sharma, portfolio manager at First Investors Management Co. "Apple is something everyone wants in their portfolio."
But Apple's high-profile was a double-edged sword when it came to managing the transaction and keeping it under wraps while getting SEC documentation and ratings in order.
Doing a deal of such size in one day is a challenge in itself. The deal attracted 2,000 orders from 900 investors, amounting to a record US$50.2bn, for six separate tranches spanning three-year and five-year fixed and floating-rate notes, plus 10-year and 30-year fixed-rate bonds.
"It required a lot of preparation, a lot of planning, organisation and team work to make it look as smooth as it did," said Jonathan Fine, head of US investment-grade debt syndicate for Goldman Sachs.
Keeping the deal a secret for so long was one reason why Apple is believed to have had just Goldman manage the process from January. Market sources said Deutsche Bank was added as a bookrunner in April. Neither firm would comment on the timeline.
"I think the two-bank strategy optimised speed, timing, allocation and confidentiality," said Erich Mauff, head of capital markets and treasury solutions for Deutsche in North America. "Plus you've got two big balance sheets to trade the bonds in the secondary market. Ultimately, if you're going to do a deal very quickly and very confidentially, this is the way to do it."
Winning the mandates on such a high-profile deal will certainly be cause for quiet satisfaction for both firms. They may privately feel that it represents a particular vote of confidence because Apple was able to reward banks that had served it best and would do the best job in distributing the paper, rather than considering rotation, or repaying earlier favours.
Even rival bankers disappointed to have missed out expressed - albeit through gritted teeth - respect for Apple's decision not to mandate a plethora of banks, or to name some as active and others as passive.
Certainly, the deal was a resounding success. The leads priced and sized the deal to a tee, as evidenced by its after-market trading, which saw all tranches tighten by a few basis points.
"What is important in deals of such size is to not lose sight of what is considered fair value in the marketplace, because at the end of the day the secondary market will tell you how much you left on the table," said Fine. "In this deal you can see it was priced and sized bang on the nose."
Apple locked in funding at a blended coupon of just 1.87%, with a weighted average maturity of 10.7 years. As aggressive as that sounds, it was difficult to find an investor who did not like the deal.
To get there required the tricky task for such a big fundraising of creating some semblance of rarity value, a task made more difficult after strategists had widely forecast that Apple would need to raise US$55bn over the next three years, at a US$15bn-$20bn clip a year.
Apple managed to do so by telling investors that this deal would be its only one this year. No more deals are planned and it gave no indication of any desire, let alone any plans, to tap euros or other currencies.
With a US$50.2bn book Apple could have easily issued more than US$17bn, but its banks advised it to resist that temptation - and it listened. It also heeded warnings that squeezing pricing too much across the board would be a mistake.
Initial thoughts were set at the widest possible range of indications to capture as many investors as possible, and then ratcheted in so it was just 5bp wider than Triple A rated Microsoft on the 10-year bond. At that spread it left something on the table for investors, but was still within reach of eventually trading through Microsoft.
"It offered about a 5bp-10bp new-issue concession" at the longer end, said Matt Duch, senior portfolio manager at Calvert Investments. "That's good, because I can see this trading through Microsoft at some point."
But with so much demand for short-dated paper, Apple cut its blended funding costs by pricing the short end aggressively. At just Libor plus 5bp, the US$1bn three-year FRN became the most tightly priced floater ever in that maturity.
The US$1.5bn 0.45% three-year fixed-rate tranche was priced at Treasuries plus 20bp, 15bp tighter than initial whispers; the US$2bn five-year floater came at Libor plus 25bp, from plus 40bp initial talk, while the US$4bn five-year fixed-rate piece came at Treasuries plus 40bp, 15bp tighter than plus 55bp whispers.
Sizzling prices at the short end also helped to push yield-hungry investors into the longer tranches.
More than US$16.5bn of orders came in for the US$5.5bn 10-year 2.4% tranche, which now holds the record for the largest single tranche ever issued by a corporate. Apple started out with initial thoughts 15bp-20bp wider than the final 75bp launch spread.
The US$3bn 30-year 3.85% piece, among the largest 30-year tranche issued in the dollar markets, priced at 100bp over Treasuries and offered the best value for investors, with a 10bp pick-up to where Microsoft had issued its own 30-year deal the week before.
(This story will be published in the May 4 issue of International Financing Review, a Thomson Reuters publication; www.ifre.com)
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