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DealBook: Apple Raises $17 Billion in Record Debt Sale

April 30, 2013 by Leave a Comment

Timothy Cook, the chief of Apple.Eric Risberg/Associated PressTimothy Cook, the chief of Apple.

With a $145 billion cash hoard, Apple could acquire Facebook, Hewlett-Packard and Yahoo — and still have more than $10 billion left over.

Despite its uncommonly flush balance sheet, Apple borrowed money on Tuesday for the first time in nearly two decades. In a record bond deal, the company raised $17 billion, according to a person briefed on the deal, paying interest rates that rival those of debt issued by the United States Treasury.

Apple’s corporate-finance maneuver raises a riddle: Why would a company with so much cash even bother to issue debt?

The answer has a lot to do with the frenzied state of the bond markets. Companies are issuing hundreds of billions of dollars in debt to exploit historically low interest rates and strong investor demand for bonds as an alternative to money market funds and Treasury bills that paying virtually nothing.

“If you look at these big companies like Apple and Microsoft doing these big, low-cost bond offerings, it’s a way for them to raise money in an effort to create better returns for their shareholders,” said Steven Miller, a credit analyst at SP Capital IQ. “The bond markets are practically begging these corporations to issue debt because of how cheap it is to raise money.”

But Apple’s move also reflects the challenges of a highly successful business with a flagging stock price. In an effort to assuage a growing chorus of concerned and disappointed Apple investors, the company is issuing bonds to help finance a $100 billion payout to its shareholders. It will distribute most of that amount over the next two and a half years in the form of paying increased dividends and buying back its stock.

While Apple’s shareholders and analysts welcome the company’s financial tactics, they say that the maker of iPhones, iPads and iMacs must continue to innovate and fend off increasing competition.

“This is a substantial return of cash, and it’s the right thing to do on many levels,” said Toni Sacconaghi, an analyst at Bernstein Research. “But, ultimately, the company has to execute. This is no substitute for that.”

By raising cheap debt for the shareholder payouts, Apple will also avoid a potentially big tax hit. About two-thirds of Apple’s cash — about $102 billion — sits overseas in lower-tax jurisdictions. If it returned some of that cash to the United States to reward its investors, the company could have significant tax consequences.

“We are continuing to generate significant cash offshore and repatriating this cash would result in significant tax consequences under current U.S. tax law,” said Peter Oppenheimer, Apple chief financial officer, during an earnings call last week.

In some ways, the bond issue on Tuesday was made necessary by Apple’s tax strategies.

“They have been so successful with their tax planning that they’ve created a new problem,” said Martin A. Sullivan, chief economist at Tax Analysts, a publisher of tax information. “They’ve got so much money offshore.”

The $17 billion debt sale by Apple is the largest on record, surpassing a $16.5 billion deal from the drugmaker Roche Holding in 2009. Apple joins a parade of large companies issuing debt with astonishingly low yields. Last week, the shoe company Nike sold bonds that mature in 10 years that yielded only 2.27 percent. Last July, Bristol-Myers issued five-year debt yielding 1.06 percent. In November, Microsoft set the record for the lowest yield on a five-year bond, issuing the debt at 0.99 percent.

Despite Apple’s $145 billion cash pile, the credit-ratings agencies did not award the company their coveted triple-A rating, citing increased competition and a concern that its future product offerings could disappoint. Moody’s Investors Service gave the company its second-highest rating, AA1, as did Standard Poor’s, rating the company AA+. (The four companies awarded the highest credit ratings by both Moody’s and S.P. are Microsoft, Exxon Mobil, Johnson Johnson and Automatic Data Processing.)

“There are inherent long-run risks for any company with high exposure to shifting consumer preferences in the rapidly evolving technology and wireless communications sectors,” wrote Gerald Granovsky, a Moody’s analyst.

Apple’s less-than-perfect rating did not drive away bond investors on Tuesday. The offering generated investor demand well in excess of the $17 billion raised, according to person briefed on the deal. Goldman Sachs and Deutsche Bank led the sale of the issuance.

Desperate for returns in a yield-starved world, all types of investors — including individual, pension funds and mutual funds — are snapping up corporate debt. The demand appears to be insatiable: this year, through last Wednesday, a record $55 billion has flowed into mutual funds and exchange-traded funds that invest in corporate debt with high-quality ratings, according to the fund data provider Lipper.

The last time Apple sold debt was in 1996, when the Internet was in its infancy and sales of Apple’s niche computers were struggling. Facing an uncertain future and struggling with a weak balance sheet, Apple had a junk credit rating and was paying 6.5 percent on its debt.

Article source: http://dealbook.nytimes.com/2013/04/30/apple-raises-17-billion-in-record-debt-sale/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Terms of Greek Bond Buyback Top Expectations

December 4, 2012 by Leave a Comment

While the buyback had been expected, the prices offered by the government were above what the market had forecast, with a minimum price of 30 euro cents and a maximum of 40 cents, for a discount of 60 percent to 70 percent.

Analysts said they expected that the average price would ultimately be 32 to 34 euro cents, a premium of about 4 cents above where the bonds traded at the end of last week.

Pierre Moscovici, the French finance minister, played down concerns that the Greek debt buyback might not go as planned.

“I have no particular anxiety about this,” Mr. Moscovici said Monday at the European Parliament ahead of the meeting in Brussels of euro zone finance ministers to discuss Greece. “It just has to be very quick.”

A successful buyback is critical for Greece. The International Monetary Fund has said that it will lend more money to Greece only if it is reasonably able to show that it is on target to achieve a ratio of debt to annual gross domestic product of less than 110 percent by 2022.

Greece will have at its disposal 10 billion euros, or $13 billion, in borrowed money from Europe. Investors who agree to trade in their Greek bonds will receive six-month treasury bills issued by Europe’s rescue vehicle, the European Financial Stability Facility. The offer will close Friday.

If successful, the exchange will retire about half of Greece’s 62 billion euros in debt owed to the private sector. The country still owes about 200 billion euros to European governments and the I.M.F.

Analysts said that Greek, Cypriot and other government-controlled European banks, which have as much as 20 billion euros worth of bonds, were expected to agree to the deal at a price in the low 30s. That would mean that to complete the transaction, hedge-fund holdings of 8 billion to 10 billion euros in bonds would have to be tendered at a price below 35 cents. Any higher price would mean that Greece would have to ask its European creditors for extra money — an unlikely outcome at this stage.

Even though Greece is so close to bankruptcy, its bonds have become one of the hot investments in Europe. Large hedge funds, like Third Point and Brevan Howard, have accumulated significant stakes, starting this summer when the bonds were trading in the low teens. Shorter-term traders have been snapping up bonds at around 29 cents to make a quick profit by participating in the buyback.

In a research note published Monday, analysts at Nomura in London said it was “reasonable and likely” that enough hedge funds — especially those that might be more risk-averse and or have a shorter perspective — would agree to the deal at a price below 35 cents.

But there are also foreign investors looking to the longer term who may decide to hold onto most of their holdings in the hope that the bonds rally even more after a successful buyback.

“I think the bonds could go to as high as 40 cents in a nonexit scenario,” said Gabriel Sterne, an analyst at Exotix in London, referring to the consensus view that Greece will not leave the euro zone anytime soon.

Bondholders were encouraged by comments from Chancellor Angela Merkel of Germany, reported in the German news media over the weekend, that raised the possibility that European governments might offer Greece debt relief in the future. A number of bondholders expect Greek bond yields to trade more in line with those of Portugal in the coming years, but without the prospect of a future buyback to push up the prices of Greek government bonds, the risk to such an approach is substantial.

Jean-Claude Juncker, the president of the group of finance ministers whose countries use the euro, told a news conference late Monday in Brussels that ministers would meet again on the morning of Dec. 13 to make a final decision on aid disbursement to Greece.

Mr. Juncker said he was confident that Greece would receive its money on that date, but he declined to comment on the prospects for success of the buyback program because it was a sensitive matter for the financial markets.

Mr. Juncker has been the president of the group of ministers since 2005, and the post gives him significant power over what is discussed at the group’s meetings.

Mr. Juncker reiterated at the news conference that he would step down at the end of this year or at the beginning of next year. But he declined to signal his preference for any particular successor.

“I don’t have to endorse anyone,” Mr. Juncker said. “I was asking my colleagues to provide for my succession,” he said, referring to discussions held with ministers earlier in the evening.

Separately, Spain, which is also seeking to overcome crippling debt problems, began the process Monday of formally requesting 39.5 billion euros in emergency aid to recapitalize its banks. It also announced that a tax amnesty had yielded only 1.2 billion euros, less than half what the government had expected.

The request for emergency aid was being sent to authorities managing the euro zone bailout funds, according to Spanish officials, who added that no further approval would be needed from ministers meeting in Brussels.

The request follows the European Commission’s approval last week of a plan to make the granting of the aid conditional on thousands of layoffs and office closings at four Spanish banks: Bankia, Catalunya Banc, NCG Banco and Banco de Valencia.

James Kanter contributed reporting from Brussels.

Article source: http://www.nytimes.com/2012/12/04/business/global/greece-announces-terms-of-13-billion-bond-buyback-to-slash-debt.html?partner=rss&emc=rss

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Greece Announces Terms of Bond Buyback to Slash Debt

December 3, 2012 by Leave a Comment

While the buyback had been expected, the prices offered by the government were above what the market had forecast, with a minimum price of 30 cents on the euro and a maximum level of 40 cents, for a discount of 60 to 70 percent.

Analysts expect that the average price will ultimately be 32 to 34 cents on the euro, which would represent a premium of 4 cents above the level where the bonds traded at the end of last week.

Pierre Moscovici, the French finance minister, played down concerns that the Greek debt buyback might not go as planned. “I have no particular anxiety about this,” Mr. Moscovici said Monday at the European Parliament ahead of the meeting of euro zone finance ministers to discuss Greece in Brussels. “It just has to be very quick.”

A successful buyback is critical for Greece. The International Monetary Fund has said that it will lend more money to Greece only if it is reasonably able to show that it is on target to achieve a ratio of debt to annual gross domestic product of less than 110 percent by 2022.

Greece will have at its disposal €10 billion, or $13 billion, in borrowed money from Europe. Investors who agree to trade in their Greek bonds will receive six-month treasury bills issued by Europe’s rescue vehicle, the European Financial Stability Facility. The offer will close Friday.

If successful, the exchange would retire about half of Greece’s €62 billion in debt owed to the private sector. The country still owes about €200 billion to European governments and the I.M.F.

Analysts believe that as much as €20 billion worth of bonds held by Greek, Cypriot and other government-controlled European banks will agree to the deal at a price in the low 30s. That would mean that in order to complete the transaction, hedge-fund holdings of €8 billion to €10 billion in bonds would have to be tendered at a price below 35 cents. Any higher price paid on the bonds would mean that Greece would have to ask its European creditors for extra money — an unlikely outcome at this stage.

Perhaps oddly, for a country that is so close to bankruptcy, Greek bonds have become one of the hot investments in Europe. Large hedge funds, like Third Point and Brevan Howard, have accumulated significant stakes starting when the bonds were trading in the low teens this summer. Shorter-term traders have been snapping up bonds at around 29 cents in order to make a quick profit by participating in the buyback.

In a research note published Monday, analysts at Nomura in London said it was “reasonable and likely” that enough hedge fund investors — especially those who might be more risk-averse and have a shorter perspective — would agree to the deal at a price below 35 cents.

But there are also a number of foreign investors looking to the longer term who may decide to hold onto a major proportion of their holdings in the hope that the bonds will rally even more after a successful buyback.

“I think the bonds could go to as high as 40 cents in a non-exit scenario,” said Gabriel Sterne, an analyst at Exotix in London, referring to the now widely accepted consensus view that Greece will not leave the euro zone anytime soon.

Comments by Chancellor Angela Merkel reported in the German news media over the weekend raising the possibility that European governments might offer Greece debt relief in future years have also encouraged bondholders, a number of whom expect Greek bond yields to trade more in line with those of Portugal in the coming years. But the risk to such an approach is substantial. No longer will there be the prospect of a buyback to push up the prices of Greek government bonds.

Spain, which is also seeking to overcome crippling debt problems, began the process Monday of formally requesting €39.5 billion in emergency aid to recapitalize its banks. It also announced that a tax amnesty had yielded only €1.2 billion, less than half what the government had expected.

The request for emergency aid was being sent to the authorities managing the euro-zone bailout funds, according to Spanish officials, who added that no further approval would be needed from ministers meeting in Brussels.

Article source: http://www.nytimes.com/2012/12/04/business/global/greece-announces-terms-of-13-billion-bond-buyback-to-slash-debt.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Your Money: Taking a Chance on the Larry Portfolio

December 23, 2011 by Leave a Comment

This turns out to be a pretty good instinct. After all, people consistently brag about their winning bets without disclosing their losers. They also tend to obsess over whatever’s happened in the markets most recently, assuming things will be that way forever.

But the one thing that we all ought to be able to agree on is this: The point of any long-term portfolio for the vast majority of investors is to earn whatever return you need to meet your goals while taking the least amount of risk.

I recalled this first principle of investing when I heard about something called the Larry Portfolio earlier this year.

Named for Larry Swedroe, the director of research and a principal at BAM, a wealth management firm in Clayton, Mo., the portfolio tracks indexes that achieved nearly the same 10 percent annual return between 1970 and 2010 as a portfolio invested entirely in the Standard Poor’s 500-stock index. And here’s the Larry Portfolio’s trick: It did so with less than a third of its money in stocks, with the rest in one-year Treasury bills.

So how does it work? It starts with a bit of investing history. Between 1927 and 2010, small-cap value stocks outearned the S. P. 500 by roughly four percentage points annually. This is according to an index of such stocks that two academics, Eugene Fama and Kenneth French, developed in conjunction with their research on the small-and-value phenomenon.

The reasons for this outperformance aren’t entirely clear, though plenty of theories exist.

Smaller companies may be more vulnerable if they lose a single big customer, or if a single big lender cuts them off. Value stocks, which generally have low price-to-earnings ratios, often have more debt. Then there are the many investors who choose growth stocks over value, buying them up because they tend to be more familiar names.

What these factors share is that they all have something to do with risk. For whatever reason, market participants see small and value companies as being more risky. So on average, it makes sense that investors should expect to get a little more back over the very long haul if they have the guts to take the risk and invest in them.

Mr. Swedroe, who is 60, was not the first person to build investment portfolios around these ideas. But he was particularly well suited to get the word out.

As a young adult, Mr. Swedroe, who was Bronx-born and still talks like it, worked diligently toward a night-school Ph.D. and considered becoming a professor. Instead, he found his way into the risk management field, working for CBS, the old Citicorp and Prudential Home Mortgage.

A friend had started a money management firm called Buckingham Asset Management in Missouri and was struggling to explain his investing philosophy to new clients. Seeing an opportunity to satisfy his teaching urge, Mr. Swedroe agreed to join the firm and help spread the word.

In the 15 or so years since then, Buckingham has come to be known as BAM and oversees investment strategy for other firms’ clients, too. Mr. Swedroe, the co-author of “Investment Mistakes Even Smart Investors Make and How to Avoid Them” and many other books, became enough of a cult figure that BAM’s Web site now sheepishly explains that, alas, he’s too busy to be the personal adviser for every BAM client who wants him to serve in that role.

As for the Larry Portfolio, which he prefers to refer to by more technical names, the only stocks it contains are mutual funds that hold small or value stocks (preferably both) from around the world. Everything else tends to go into very safe bonds.

For illustration purposes, he points people to the S. P. 500 index, which returned about 10 percent annually between 1970 and 2010. If you wanted to gin up a portfolio to match closely (at 9.8 percent) that performance with much less risk, all you would have needed to do was put 32 percent of your money in a fund mimicking the United States stock index of small and value companies that Mr. Fama and Mr. French developed. Then you’d put the other 68 percent of your money in one-year Treasury bills.

The execution is where this gets a little complicated. Mr. Swedroe, who invests this way with his own money, and BAM use small-cap value funds from, among others, Dimensional Fund Advisors, where both Mr. Fama and Mr. French are consultants and board members. Retail investors generally can’t put money into the funds unless they work with advisers who have been vetted by D.F.A. and have attended its California boot camp, which I wrote about in January. (Some 529 college savings and workplace retirement plans include D.F.A. funds too.)

Then there are the caveats. While having just 32 percent of your portfolio in stocks means you can lose only so much, that low equity allocation also keeps you from winning big when stocks are on a multiyear tear.

In fact, whenever something like the Larry Portfolio looks different from whatever the Dow or the Nasdaq are doing, there is sizable risk of regret. In 1998, for instance, the S. P. 500 earned 28.6 percent, while that Fama/French index lost 10 percent.

Anyone watching that unfold in slow motion would be at risk of giving in and selling, thus locking in their losses. “You have to tell yourself that you are not going to have portfolio envy or listen to what Jim Cramer is saying on CNBC,” Mr. Swedroe says. “Are you willing to pay that price?” (If you are, you might also see years like 2001, where the Fama/French index gained 40.6 percent while the S.P. 500 lost 11.9 percent.)

Education is the armor that protects you from emotions, according to Mr. Swedroe. Given who he works for, he’s a big believer in the idea of hiring an educator — an investment adviser — who protects you from the hair-trigger impulses that position your fingers over the sell button.

Lest you think this is all a ruse to get people to pay BAM’s fee — up to 1.25 percent of their invested assets annually, with additional family members benefiting from discounts — it’s worth noting that Mr. Swedroe spends about an hour on most days answering questions from people who write to him, BAM clients or not.

His challenge is that there aren’t a lot of options for people who want to have all of their stock money in the kind of inexpensive, very small and deep-value mutual funds that can most efficiently mimic the Larry Portfolio.

And much depends on how you construct that portfolio. Vanguard, using a set of indexes that serve as a foundation for its mutual funds, including an index that goes back only to 1979, couldn’t recreate the Larry Portfolio’s 4o-year performance. Mr. Swedroe countered with a different approach that would at least allow a Vanguard investor to reduce risk significantly without sacrificing returns. (Meanwhile, the future, as always, is unknowable, though all of the science would suggest that the small-and-value outperformance ought to persist.)

People should be so lucky as to have any choice among indexes in the first place. Too many investors are subject to whatever mediocre mutual fund choices their employer puts in front of them in their workplace retirement plans. If you’re not stuck in your employer’s plan, you can take a deep dive on some of the smallest and most value-oriented mutual funds that exist and take your pick. In the online version of this column, I’ve linked to a spreadsheet that Morningstar cooked up for me this week that lists more than 50 of them. Beware, as actively managed mutual funds can and do perform poorly over multiyear stretches with no warning or apology.

The Rydex SP SmallCap 600 Pure Value exchange-traded fund is also worth a look. Its expenses are low, and it contains stocks whose market capitalization, price-to-earnings ratios and price-to-book ratios are all low — attributes to seek from the mutual funds, too.

Hand-holding may still be attractive to you, though, and there are some professionals who can put you in D.F.A. funds for well under the standard annual fee — 1 percent of assets — that many professionals charge. I particularly like AssetBuilder, where annual fees start at 0.45 percent and go down from there. You need $50,000 to get started there.

Other firms worth a look include Index Fund Advisors, Evanson Asset Management and Cardiff Park Advisors. I’ve linked to their fee information from the online version of the column.

Just keep in mind that you may not always get comprehensive tax, insurance and estate advice from more value-priced money management operations. When and if your portfolio number gets bigger and your life becomes more complicated, paying for all of that wisdom is sometimes the best investment of all.

Article source: http://feeds.nytimes.com/click.phdo?i=c7dcdd71963fec3fc2c14a8516e7388d

Filed Under: Your Money Tagged With: , ,

Bucks: Online Treasury Sales Challenge Elderly Investors

May 20, 2011 by Leave a Comment

The federal government has started shifting the purchase of Treasury securities to the Internet to cut costs, which means many elderly investors are facing an unwelcome change.

The United States Treasury Department has begun phasing out its older Legacy Treasury Direct program, which allows users to buy Treasury bills and other securities by mail or phone and receive paper statements. It has started limiting use of the system and will completely shut it down on Nov. 1, 2012. Users must switch to the newer, Web-based TreasuryDirect system, or arrange to buy Treasury bills, notes and bonds through a bank or broker — which typically involves a fee. Slightly more than 200,000 people are affected, according to the Bureau of the Public Debt, the Treasury arm that handles the sale and redemption of Treasury bills and other government securities.

“As a convenient alternative, I encourage you to open a TreasuryDirect account to continue investing in Treasury securities,” says a letter to investors from Paul V. Crowe, assistant commissioner of retail securities for the bureau, that went out at the beginning of April.

The problem is that most users of the older system are elderly — their average age is 75, and many are over 80. Many lack computers, or the inclination to use one. The department acknowledges that the shift will be challenging for these people and encourages them to have their children, grandchildren or other trusted helpers assist them with the change. The letter advises investors who need help to call 304-480-7711 and select Option 2. There’s also a toll-free number available through one of the Federal Reserve banks, 800-722-2678.

It’s not just the technology that poses hurdles for some users. Investors who want to move their existing securities into the new TreasuryDirect system have to submit a form authorizing the transfer, and their signature on the form must be certified by their bank, a bureau spokeswoman, Mckayla Braden, said. That means elderly people who aren’t mobile have to find someone to take them to the bank. Or if they’re lucky enough to have a long-term relationship with an accommodating bank, they will have to persuade a bank representative to come to them. “It’s difficult,” Ms. Braden acknowledged.

Paradoxically, the letter also notes that information is available on the Web at www.treasurydirect.gov. “We hope you’ll enjoy the benefits of our newer system,” it concludes.

One 85-year-old Treasury bill investor from Queens, who would talk only if his name was not used, is decidedly not enjoying the prospect of change. He said in a telephone interview that he and many of his acquaintances were unhappy about the switch, and were at a loss about what to do. He has a significant part of his life savings in Treasuries, he said, because they are a very safe investment. For decades, he has bought them by punching in information on his telephone keypad and having the purchase amount automatically deducted from his bank account. He doesn’t own a computer, and has had limited success learning about them at his local library. The Internet makes him uncomfortable, he said, and he doesn’t like the idea of “my savings floating in the air somewhere.” He may consider getting a brokerage account to buy them, if he’s forced to, he said, but he’s holding out hope that the Treasury Department may grant investors like him a reprieve.

That appears unlikely at this point. The “new” TreasuryDirect system is almost 10 years old and the government has been encouraging users to switch to it for more than six years, Ms. Braden said, because the government can’t justify the cost of maintaining the older system. In addition to simplified transactions and record keeping for most users, TreasuryDirect doesn’t charge any annual fee for large account balances (the old system charges $100 for accounts over $100,000). “We are looking in every corner to find ways to save money,” Ms. Braden said, “and this is one decision we had to make.”

As of May 1 of this year, no new accounts may be opened in the legacy system, and existing Legacy Direct account holders may purchase, or reinvest in, only 13-week and 26-week Treasury bills. So, for instance, if an investor has a two-year note that matures in June, the proceeds can be reinvested only in short-term Treasury bills, not in another longer-term investment. If account holders don’t make arrangements to switch to the new system by November of next year, or arrange for an account with a broker, the government will hold longer-term investments until maturity and deliver payments according to the instructions in the account.

Are you a user of Legacy Direct, or do you know someone who is affected by the change? Have you made alternative plans for buying or reinvesting in Treasury bills?

Article source: http://feeds.nytimes.com/click.phdo?i=1b917c8b420e46559b48b6a68a61027f

Filed Under: Your Money Tagged With: , ,