Earlier this week Apple Inc. issued a four-tranche bond deal worth USD8.5bn; making the most of record low borrowing costs. The four tranches were made up of USD2bn worth of 0.75% coupon bullet bonds maturing in 2023, issued at +60bps over USTs, and three callable bonds: a USD 2.25bn, 1.125% 2025’s at +80bps over, a USD1.75bn 1.65% 2030’s at +110bps over, and a USD2.5bn 2.65% 2050’s at +145bps over benchmark US Treasuries. Funds raised will go towards general corporate purposes, including share repurchases and dividend payments; Apple has already repurchased around USD38.5m worth of its stock (in the six months to end-March 2020).
We have long favoured the AA+ credit, more so at the longer-end as the bonds offer superior risk-adjusted returns and notch cushions. However, the new Apple 2.65% 2050 is currently trading with an expected return and yield of 12% and less than 2 notches of credit cushion. If we compare this to our favoured 4.45% 2044 bond, it certainly does not look as attractive. Our model calculates that the bond maturing in 2044 offers an expected return and yield of 15.7% and over 3.2 credit notches of protection.
Many would expect a longer-dated bond from the same issuer to generate higher returns, however, this is not always the case. Our proprietary Relative Value Model allows us to find anomalies in market pricing and therefore pinpoint “cheap” bonds; the example above is a great way to demonstrate just how selective we can be in terms of holdings.