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Why Apple Is Tapping the Bond Markets, Yet Again

Stocks in this article: AAPL GS

Updated from 9:19 a.m. ET to include bond offering size and Apple share prices

NEW YORK (TheStreet) - Apple (AAPL) is selling $12 billion in debt finance an expanded stock buyback and dividend. The company said in a prospective on Tuesday it will offer debt in seven tranches, at maturities ranging from three-to-30-years.

Another Fee Bonanza Looms For Apple Debt Underwriters

 "We intend to use the net proceeds from sales of the notes for general corporate purposes, including repurchases of our common stock and payment of dividends under our recently expanded program to return capital to shareholders," Apple said in the prospectus.

According to Bloomberg News, Apple is marketing $12 billion in debt. Apple will issue floating and fixed rate debt between three and five year maturities. The company will also sell fixed rate notes at seven, 10 and 30-year maturities.

In fiscal second-quarter earnings announced last week, Apple said it would increase its existing share repurchase program authorization from $60 billion to $90 billion and increase its cash dividend by approximately 8% to $3.29 per share. The iPhone maker also said it would finance much of that expanded repurchase and dividend activity.

Funds raised from Apple's debt offering may also be used to fund working capital, capital expenditures, acquisitions and repayment short-term debt, Apple said. Goldman Sachs and Deutsche Bank will lead the bond offering, according to a Securities and Exchange Commission filing.

Apple shares were little changed at $593.22 in Tuesday afternoon trading.

A Repeat?

Apple's newest offering is of a slightly smaller size than its $17 billion debt offering in April 2013.

Last April's offering was a record for a non-financial corporate issuer, at the time. Goldman Sachs earned $38.3 million in fees for that debt offering, while Deutsche Bank earned $9.3 million in fees.

Apple was advised well in that debt offering. The company's $5.5 billion in 10-year notes issued at an interest rate of 2.4% now trade at under 93 cents on the dollar, given a rise in interest rates as the Federal Reserve began to change communications surrounding its bond buying in the spring of 2013. Thirty year bonds issued at an interest rate of 3.85% now trade at under 90 cents on the dollar.

Both Moody's and Standard & Poor's rate Apple debt with a "stable" outlook, with Moody's issuing a Aa1 long term rating, and S&P issuing Apple a AA+ long term rating.

Investors Press Debt-Funded Buybacks

David Einhorn of hedge fund Greenlight Capital Management was the first large Apple shareholder to propose the company issue debt to fund dividend payments and share repurchases. Einhorn initially applauded Apple's decision in 2013 to finance capital returns to shareholders, however, in subsequent public appearances he has given Apple's capital management mixed reviews.

Carl Icahn waged a public campaign to have Apple increase its repurchase activity in the fall of 2013. Last Wednesday, Icahn took to Twitter to applaud Apple's move.

Icahn Enterprises owns over 4.7 million Apple shares, according to a recent filing with the SEC. At current market prices, that stake is worth around $2.7 billion, one of Icahn's largest single stock investments.

Some Apple investors such as the California Public Employee Retirement System (CalPERS) criticized Einhorn and Icahn's recommendations.

Apple's Earnings

On Wednesday, Apple reported fiscal second-quarter earnings of $11.62 a share, generating $45.6 billion in revenue. Analysts surveyed by Thomson Reuters were expecting the Cupertino, Calif.-based Apple to report earnings of $10.18 a share on $43.53 billion in revenue, as Apple continues to promise new products and new categories.

The company shipped 43.7 million iPhones, 16.4 million iPads, and shipped 4.1 million Macs during the quarter. Gross margin, a highly watched level for Apple, came in at 39.3%. On the conference call, Apple noted there are more than 800 million iTunes accounts, up from a previous number of around 600 million.

Apple CEO Timothy D. Cook noted on the call that Apple has sold more than 20 million Apple TV set-top boxes since the product was introduced.

For the fiscal third-quarter, Apple said it expects revenue between $36 billion and $38 billion, with gross margins between 37% and 38%. Operating expenses will be between $4.4 billion and $4.5 billion, and it will have a tax rate of 26.1%.

From August 2012 through March 2014, Apple has spent $66 billion in cash on its capital return program.

-- Written by Antoine Gara, with Chris Ciaccia in New York.

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