At a quick glance, it’s not entirely clear why U.S. consumer technology giant Apple Inc. (NASDAQ:AAPL) would bother raising debt. While around $200 billion of the company’s reported $215 billion in cash and securities is stashed away in longer-term securities overseas, that’s still $15 billion it can use without worry, and a whole lot more if AAPL is willing to pay U.S. taxes on it.
Yet, there it is. The company told AAPL stock holders today it is issuing another $1 billion worth of debt to, of all investors, Taiwan’s usual bond-buyers: mostly insurance companies.
Another billion in debt isn’t a big deal; the company already has $69 billion worth of it. In fact, wners of Apple stock likely won’t even notice.
But the news once again begs a couple of questions: Why is AAPL raising funds by issuing bonds … and why Taiwan?
Why Not?
Apple doesn’t need money, per se, so why does it continue to reach it to the bond market for financing?
The obvious answer is the right one: Interest rates are too cheap to not raise money now and, to the fullest extent possible, lock in those low rates. The buzz is the yield on the Apple bonds in question — full-blown 30-year debt — is going to be somewhere along the lines of 4.2% to 4.3%.
That’s not terribly different than the domestic corporate bond rate environment right now. But Taiwan’s bond buyers are compelling customers. They tend to want to hold onto their fixed income until full maturity, meaning AAPL could enjoy relatively cheap lending costs for a long, long time.
The other, and perhaps bigger, reason that Apple and several other companies have sought out Taiwan for funding: The country has rolled out the proverbial red carpet for any blue-chip company that can supply high-quality fixed-income options for investors seeking decent but safe yields.
As was noted, the bulk of the Apple bond buyers will likely be insurance companies, who may in turn use them as the basis for consumer-oriented investment products. There aren’t enough such higher-caliber bonds from the country’s issuers alone to fully meet this demand.
That being said, the Apple bonds soon to be deployed in Taiwan may also be a form of political goodwill, if not outright currency.
A great deal of Apple’s suppliers call Taiwan home, and though they as a group certainly have reaped the benefits of iPhone-mania, the country as a whole is now being impacted by the headwind that trade-partner China began to hit last year.
While Taiwan has somewhat loosened its strict oversight of the country’s companies’ foreign dealings, it remains a tricky environment for AAPL to navigate. By creating this broad relationship with the country’s financial markets, regulators may exercise some additional leniency for the company that helps spin its economic engine.
Bottom Line for AAPL Stock
While in the grand scheme of things, Apple arguably didn’t need to ask Taiwan for a penny, let alone $1 billion, few would argue that the move was a smart political play to solidify its relationship its partners.
From that perspective, whatever.
Nevertheless, the $1 billion worth of Apple bonds about to be sold to Taiwanese investors once again raises a much more profound question most owners of AAPL stock are (or should be) asking: At what point does it start to make more sense for Apple to repatriate more than $200 billion, take the 40% tax hit, put $120 billion in its wallet and never have to worry about raising cash again?
Over the course of the past 12 months, Apple has dished out only $1.03 billion worth of interest payments to lenders/bondholders who currently own $69 billion worth of the company’s debt. The maturity date on all that debt varies, but on average, the overall interest rate Apple is paying is on the order of 1.5%, per annum.
Clearly the longer-term bonds cost more, but even if all of Apple’s debt commanded an interest rate of 4.3%, it would still only cost the company less than $3 billion per year.
For perspective, Apple has generated $50.7 billion worth of net income over the past four quarters.
And that’s when it becomes clear why Apple’s growing debt load is no big deal, and why it’s doing what it can to avoid an $80 billion tax bill. Never even mind the sociopolitical upside of parenting up with Taiwan in a new way now.
Things will certainly change in the future (albeit the distant future), and there will be a point when it does make more sense to bring that money home and take all its debt off the books. Today’s not that day, though, and tomorrow won’t be that day either.
In other words, we may want to leave Apple alone on this one matter — it knows what it’s doing.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
