Apple Record Debt Deal By the Numbers: $17B at 1.85% Overall

Don't say Apple can't get big things done in a hurry. Just a week after announcing it would enter the debt markets, Apple placed a record $17 billion in bonds today in a wildly popular offering that saw demand outstrip supply by 3:1. The offering including bonds maturing at 3, 5, 10 and 30 years, mostly with fixed rates, although on the short end there are also some notes with variable interest rates. Altogether, the blended rate Apple will pay -- at least in the first year -- comes out to 1.85% and will lead to an interest expense of $314 million.

The included chart, based on a Reuters report and a Wall Street Journal accounting, shows the amounts and interest rates for the six types of bonds issued by Apple. The largest chunk, $5.5 billion in 10-year notes yielding 2.415% interest is noteworthy because the rate is very nearly the 2.413% paid just last week by Microsoft . Significantly, however, Microsoft's debt is rated AAA while Apple's is a grade below: AA-plus according to Standard & Poor's and Aa1 per Moody's Investors Service. (The U.S. Treasury currently pays 1.7% on its 10 years, and 2.88% over 30, to give you an idea of how small Apple's risk premium is perceived to be.) S&P did make a point of acknowledging Apple's creditworthiness despite offering a rating one notch short of the top, saying it expected Apple to maintain "excellent liquidity and significant net cash balances."

In fact, as I discussed last week, Apple was already on track to continue growing its $147 billion cash trove even with its announcement that it was going to spend $100 billion on share buybacks and dividends. The purpose of the debt offering is to avoid "repatriating" a portion of that cash which is technically overseas and paying the 35% U.S. corporate tax on it. Instead, Apple will be able to deduct the above-mentioned interest expense, lowering the effective, after-tox cost of issuing all this debt down below $200 million annually. Given that only about 1/6 of the offering is subject to the vicissitudes of a changing interest-rate environment, Apple can reasonably predict these expenses throughout the life of the offering. One interesting thing to watch will be whether the first $2.5 billion that comes due in 2016 gets reissued, but even that is far off for the moment.

Importantly, with the announced buyback and the debt deal done, Apple management seems now to be free of financial engineering and able to return 100% of its focus to hardware and software engineering. Both shareholders and customers should find that news delightful

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