April 28, 2014 / 1:30 PM / 4 years ago

Apple coming back for more

(This story originally appeared on IFR, a Thomson Reuters publication)

By Danielle Robinson

NEW YORK, April 28 (IFR) - Apple is planning to hit the markets once again in the near future, to raise at least as much as the US$17bn it raised a year ago, but it is possible that giant asset managers could persuade it to double that amount and do a Verizon-style mega-deal that is generously priced.

The company said on its earnings call in the past week that “we plan to be active in both the domestic and international bond markets during 2014 for an amount of term debt financing similar to what we issued in 2013”.

Apple has just increased its authorised share buybacks by US$30bn, to US$90bn by the end of 2015. Like its US$17bn deal a year ago, it is keen to issue more debt as a way of leveraging its offshore cash balances.

Already, some investors have calculated that Apple could add a further US$30bn-$40bn of debt to its balance sheet without hurting its Double A rating.

“They are talking about doing another US$15bn or US$20bn, but we think they will do another US$15bn to US$20bn after that,” said Chuck Burge, senior portfolio manager overseeing US$15bn of assets under management at Invesco.

Such a large overhang could be used by investors, along with the shareholder-friendly use of proceeds and the lacklustre performance of its original deal, to squeeze decent new-issue concessions out of a new dollar deal - or better still, convince the tech giant to just get all of its funding plans done in one hit.

“Apple could use the Verizon deal as a model of how to structure this new transaction,” said Burge. “Verizon went to investors and started saying, we would like to do an M&A deal of around US$20bn-$25bn, and then they got the idea that they could take care of all of their financing needs in one hit at a price that investors wanted.”

Apple priced its first deal with little to no new-issue concession last April, only to see its longer-dated tranches plunge by more than eight points in price at one stage when then Fed Chairman Ben Bernanke first hinted in May at tapering the Fed’s QE bond buying programme.

Total return investors’ bitter experience with the Apple deal was one of the reasons why Verizon needed to offer huge new-issue spread cushions, especially on the long-dated tranches of its record US$49bn offering in September.

STARK CONTRAST

Now, the execution strategies of the Apple and Verizon deals stand in stark contrast to one another in the minds of investors.

Apple squeezed on price and, apart from its short-dated tranches, its bonds have never really outperformed. Its 3.85% 2043s still trade below par at 89 and wider than the Treasuries 100bp new-issue spread - at plus 105bp.

Verizon’s US$15bn 6.55% September 2043 tranche, on the other hand, was priced with a 90bp new-issue concession and reaped investors billions of dollars of profits immediately. It has been a stunning outperformer, currently trading at US$124.00 bid or 154bp over Treasuries, from a new-issue spread of 265bp.

Apple could counter the overhang argument, at least, by insisting it will only issue a certain amount of term debt in US dollars this year.

Moody’s has also just given Apple a P-1 commercial paper rating and expects it will issue up to US$10bn in CP. Moody’s also warned that if Apple borrowed “meaningfully more” than the incremental US$25bn that it needs to pay for share repurchases, then “that would be credit-negative and could pressure the long-term rating down”.

The demand for high-grade bonds is also so immense, both in the US and in euros and sterling, that many think Apple will be able to issue in sizes and currencies that reap the best cost of funds.

“There is just huge appetite for paper, so much so that a new deal would probably be done easily and at a very nice level for the company,” said Mirko Mikelic, senior portfolio manager for Fifth Third Bank’s ClearArc Capital.

According to Michael Collins, senior portfolio manager at Prudential, demand technicals continue to reach new heights.

“It feels like we are entering into a new phase of the credit cycle, where issuers are taking advantage of stable rates to increase leverage, underwriting standards have arguably gotten worse in some cases and investors are falling over themselves to get bonds,” Collins said. (Reporting by Danielle Robinson;additional reporting by Shankar Ramakrishnan and Charlie Thomas; Editing by Matthew Davies)

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