Fixed IncomeMay 7 2013

Managers take a bite out of Apple

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ByMatthew Jeynes

UK bond fund managers snapped up Apple’s record-breaking corporate bond issue last week, hailing it as an opportunity to boost their income while adding minimal extra risk.

The $17bn (£10.9bn) Apple ‘iBond’ issue was oversubscribed three times as demand far outstripped supply, and bond managers from Kames Capital to Aberdeen managed to take a bite out of the issue.

The issue was divided into a range of tranches, from three years up to 30 years, with the 10-year bond offering a coupon of 75 basis points higher than equivalent US government bonds at 2.4 per cent.

The yield on all of the bonds has since narrowed as high demand for them continued in trading following the issue, pushing up the prices.

Oliver Boulind, head of global credit and global high yield, said the issue was “a great investment opportunity” due to the firm’s “broad offering of popular products and a history of innovation that continues to drive rapid sales growth”.

He said the bond was the ideal sort of issue for a diversified global portfolio and the “spread above US government bonds still leaves room for continued performance relative to other technology issuers as well as other opportunities”.

With $145bn of cash on its balance sheet, Apple had no urgent need to take on debt, but $100bn of the cash is held in overseas accounts and it would incur a 35 per cent tax liability if brought back to the US.

Therefore, to meet demands to return $55bn in cash to help arrest the sliding share price, the company has opted for bond issuance, taking advantage of record-low yields to borrow cheaply.

The pressure from investors to return cash was one of the reasons why ratings agency Moody’s decided not to give Apple a top Aaa rating, instead going for Aa1, one level below the top.

The agency cited the business risk inherent in the technology sector, the possibility Apple will need to raise more debt because of its non-US cash pile and the fact that shareholders will likely force this by demanding more cash to be returned.

David Roberts, co-head of fixed income at Kames Capital, said he had bought into the 10-year issue across its strategic bond mandates with a weighting of just under 1 per cent.

He said the yield was attractive as it was roughly 50 per cent higher than on US treasuries. “For a highly rated, high-quality bond, we think it is an easy way to increase our income without too much more risk,” he said.

However, GLG’s Jon Mawby, who manages the group’s Corporate Bond and Strategic Bond funds, said he had avoided the bond issue.