Apple Shops 3rd Big Bond Offering - $5B - Since 2013 Amid Shareholder Plans

Apple is in the market with a $5 billion offering of SEC-registered senior notes, as the company continues to buy back its shares at an aggressive pace. The issuer – which has achieved among the lowest funding costs on record for blockbuster offerings through its ramp higher in direct shareholder returns – intends to place five-year notes in fixed- and/or floating-rate formats, along with new seven-, 10-, and 30-year issues, sources said.

Initial whispers for the double-A offering were reported in the areas of T+55 for five-year, fixed-rate notes, T+80 for seven-year notes, T+95 for 10-year notes, and T+137.5 for 30-year bonds. Those midpoints suggest reoffers near 1.75%, 2.3%, 2.62%, and 3.63%, respectively.

Last April, the company inked a $12 billion offering that included five-year floating-rate notes at L+30; 2.1% five-year fixed-rate notes at T+37.5; 2.85% seven-year notes at T+60; 3.45% 10-year notes at T+77; and 4.45% 30-year bonds at T+100.

In April 2013, Apple inked $17 billion of notes as it embarked on its shareholder-return program, printing issues including five-year notes at L+25 for FRNs and T+40 for a 1% issue; 2.4% 10-year notes at T+75; and 3.85% 30-year bonds at T+100.

For reference, the 2.1% notes due May 2019 changed hands on Friday at date-adjusted levels in the mid-T+30s, while the 2.85% seven-year issue traded in the mid-T+50s, the 3.45% 10-year issue traded in the low T+70s, and the 4.45% 30-year issue traded near T+120, trade data show.

The company has established among the lowest funding costs on record for shorter-dated issues since 2013, including two of the five tightest initial reoffer spreads ever recorded for three-year issues. But the company’s new-issue spread curve tended to be steeper than some similarly rated companies in recent years, including Wal-Mart and Exxon Mobil.

Apple bought back roughly $45 billion of its shares over the 12 months through Dec. 27, 2014, the most in its history, according to S&P Capital IQ. It bought back $26 billion over the year-earlier period, after repurchasing less than $2 billion in 2012.

However, the company still generated more in operating cash flow ($70.8 billion) over the 12 months through Dec. 27 last year than the combined $67 billion sum of capital spending ($10.8 billion), share buybacks, and common dividends ($11.2 billion).

“We view Apple's financial risk profile as ‘minimal,’ reflecting operating margins and return on capital in excess of 30% in recent years. We expect Apple to maintain conservative financial policies, including maintenance of a very significant surplus cash position,” S&P stated in ratings rationale published in December.

“Our rating and outlook incorporate the company's substantial share repurchases and intention to increase dividends on an annual basis. Although total shareholder returns may moderately exceed discretionary cash flow on an annual basis, robust overall cash generation affords the company the flexibility to return large amounts of cash to shareholders without detracting from the overall credit quality. Furthermore, Apple's substantial net cash position relative to funded debt provides considerable debt capacity within the rating,” S&P analysts added.

Bookrunners for today’s offering, which is guided to an AA+/Aa1 profile (stable on both sides), are Goldman Sachs and Deutsche Bank.

Proceeds are officially earmarked for general corporate purposes, including stock buybacks, dividends, working capital, capital spending, and acquisitions and repayment of debt, according to regulatory filings.

Of note, Apple last year incurred its first significant short-term borrowings since the mid-1990s, reporting a record-high $6.3 billion as of Sept. 27, according to S&P Capital IQ.   

"Based on estimates of the decline in domestic cash, Moody's estimated that Apple could borrow an incremental $25 billion to fund the share purchases, which should be accommodated within the expectations of the Aa1 long-term rating,” Moody’s analysts wrote last April.

“However, if debt going forward is increased meaningfully more than the $25 billion now expected by Moody's that would be negative and could pressure the rating down," Moody's added

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