Apple recently got back into the financial borrowing business with its selling of $17 billion of floating and fixed rate corporate debt obligations. Granted they've done this before but never at this grandeur scale. Why would a company with a market capitalization of over $400 billion and over $145 billion of cash already in its coffers tap into the corporate bond market at this time? After all, they have announced their desire to pay higher dividends and to increase their stock buyback thereby returning some of their cash hoard to shareholders through these programs rather than invest it either internally or externally. So, why borrow money?
Typically, most corporations only return cash to shareholders when management is of the opinion that organic growth prospects ("spending money on R&D") is not likely to give them the return on investment they could realize from returning that cash to shareholders. Acquisitions are also another way for management to grow a company but for an innovative company like Apple such acquisitions would hardly make a dent in their future revenue or bottom-line net income. Besides they still have ample cash should some "killer" new company come along and they want that technology for their own devices.
So, why is this event worth noting? Besides it helping Apple to avoid $9.2 billion of corporate tax implications had it chosen to repatriate their cash reserves held at international subsidiaries, well, it tells me that one of the smartest companies in the world knows an amazing deal when they see it. They view the corporate debt market as a great opportunity to secure cheap money and better act upon it or it could easily fade into the sunset never to be realized again. So, with that, Apple borrows a ton of money at an incredibly low interest rate to be paid back over the next 3 to 30 years. And, with interest expense being tax deductible, they can now get that after-tax interest rate down by another 35% (their effective tax rate).
I believe Apple management's timing here is impeccable and will be looked at as one of the greatest engineered financing transactions of 2013. After all, it is the largest corporate debt offering on record. Now, let me be clear, I'm only referring to the cheap debt aspects of this transaction not their chosen use of the proceeds. I'm not a believer in buying back stock of a company in such a precarious economic climate but I am for one paying dividends especially with their huge cash position. Some might argue that's one in the same as they both return cash to shareholders only dividends are paid to ALL shareholders and the buyback is limited to just those shareholders that actually sell stock. Any inflated share price due to the buyback (increased demand for the stock) could easily be deflated by a down market and economy just as quickly so this kind of payback can be limited.
So what does one do with this information? Well, if you've not locked in to a long-term mortgage by now, expect to be paying higher borrowing rates soon. If you are holding long-term debt instruments (like newly issued Apple corporate bonds!) then you might consider unloading them before everyone else does in a rising interest rate environment. It seems crazy to me to be a holder of any long-term debt obligations at this time but makes all the sense in the world to borrow money at manageable debt service levels during this unprecedented low interest rate environment. Remember, whether it is a company the size of Apple or you buying or owning a home, don't pay with cash when you can lock in such a low interest rate on borrowed money and for now, it's tax deductible interest expense. It really is less risk!
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