Friday, April 3, 2015

Why Apple Had To Issue Bonds to Increase Its Capital Value

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Apple is all set to continue expanding its debt offering program and the company is planning to launch a new sale of bonds in Swiss francs designed to take advantage of the extremely low yields available in the market. The size and maturity of the offered bonds has yet to be decided, but it is being analysed that a 10- to 15-year bond could fetch a yield of less than 0.5 percent, as predicted by the Wall Street Journal. From Apple, Goldman Sachs and Credit Suisse have been reserved to monitor the deal.

Apple makes use of debt mainly to finance its $130 billion capital return program, as the cost is substantially less than the tax burden that would be incurred by repatriating some of the more than $140 billion in cash Apple currently holds overseas. The company is expected to announce an update to the capital return program during its quarterly earnings call in April.

Apple Inc. History and Climb to Fame:
Apple Inc. is a US based Multinational Corporation with its headquarters in Cupertino California. It designs, develops and sells consumer electronics, computer software, online services, and personal computers. Its best-known hardware products are line of computers, the iPod media player, the iPhone smartphone, and the iPad tablet computer.

Apple also offers online services that include iCloud, iTunes Store, and App Store. The consumer software includes the OS X and iOS operating systems, the iTunes media browser, the Safari web browser, and the iLife and iWork creativity and productivity suites.

What basically started off as a design and development company to sell personal computers, went on to become a giant corporation and shifted its focus towards consumer electronics. It would not be wrong to term Apple as the world’s second-largest information technology company by revenue and the world's third-largest mobile phone maker and it is also the largest publicly traded corporation in the world by market capitalization and has become the first U.S. company to be valued at over $700B. The apple products are sold all over the world and are known for their best services, the great quality and the name Apple has carved for itself among the users for its convenience and great technology.

By the year end of the year in October 2014, Apple's worldwide annual revenue in 2014 totaled US$182 billion. The company enjoys a high level of brand loyalty and, as reported by the 2014 edition of the Interbrand Best Global Brands report, Apple is the world's most valuable brand with a valuation of $118.9 billion. Not only this, but as the year 2014 ended, the corporation continued to manage significant censure regarding the labor practices of its contractors, as well as for its environmental and business practices, including the origins of source materials.

Apple’s Move to Issue bonds to Increase Capital Value:
Apple Inc. is adding to its recent run of blockbuster bond deals with a debut sale in Swiss francs. This would be the corporation’s second bond issue of the year. The company raised $6.5 billion last week, with roughly a 2.5 percent yield for 10-year notes and a 3.5 percent yield for 30-year notes.

The high demand for Swiss franc-denominated debt has sent government bond yields into negative territory, which means that the investors are now willing to pay to lend Switzerland cash for as long as 10 years. As the Swiss bank removed the franc’s euro peg, it caused the currency rate to rise sharply and this is being taken as a positive move on the corporation’s part to increase its capital value. It also means that Apple will be able to borrow cheaply as the bonds are linked to the price of the government debt.

According to experts, “Apple has proven itself to be pretty thoughtful and shrewd when it comes to capital allocation over the last couple of years, and that hasn’t been lost on the bond market,”, a technology analyst at S&P Capital IQ said Scott Kessler was reported stating in New York. “It makes sense for them to be active participants in the corporate bond market.”

As a result of Apple's successful earnings, the company took advantage of low interest rates to issue $6.5B worth of new debt. The offering would include floating-rate bonds as well as fixed-rate bonds considering that interest rates are already at historical lows. Apple currently has $32.5B outstanding in long-term debt and $3.9B outstanding in short-term commercial paper. Apple also has $178B in cash and liquid assets; however, an estimated $158B of it is present in its foreign subsidiaries. It is expected that Apple will use the proceeds from its new bond offering to repurchase shares and do well in the coming years.

It is predicted that Apple's shares offer a better investment opportunity than Apple's bonds, especially since the dividend yield of 1.6% on its shares is comparable to the 1.7% effective interest rate on its bonds.

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