What Was Left Unanswered In Today's Apple Record Bond Offering

Tyler Durden's picture




 

When people talk AAPL, especially defensively, the first thing they note is that while the growth prospects may be dimming, the company has a massive $145 billion (as of March 31, 2013) in cash and equivalents. Surely, this amount has to be netted out of any P/E calculation making it appears so very cheap, depending on what forward Earnings number one uses. Well, as today's bond offering showed, Apple's cash "here" is not the same as Apple's cash "there" and by here and there we mean domestic and foreign cash. In fact, the only reason Apple, which has a total cash on its books that is larger than the GDP of most countries (most of which is invested in various corporate and sovereign securities but that is irrelevant for now), had to do this bond deal, is that as we showed a year ago, a majority of its cash is effectively non-recourse due to prohibitive taxation requirements that the company would face upon repatriating said cash. Which also means that going forward all calculations that praise the company's cash will also have to haircut the offshore held cash as it is not fully recourse to the US-headquartered company.

So just how much is AAPL's offshore cash?

Well as of the most recent quarter a record 70.7%, or $102.3 billion, of its total cash was held in offshore jurisdictions! This means "only" $42.4 billion is available domestically for balance sheet acrobatics such as satisfying the recent screams for shareholder friendly actions. We say only because don't forget: now that Wall Street is a value company and has to dividend and buyback billions every quarter to satsify its unappeased shareholders, this cash won't last too long...

All of this is known, or should be known by the Apple fanatics, and certainly those who just gave AAPL cash for 30 years in exchange for a sub 4% coupon.

What, on the other hand, seems to be known by very few, is what appears to be a very disturbing trend in the distribution of cash domestically vs cash abroad.

As the chart below shows, when it comes to offshore-held cash, AAPL is indeed a cash cow. And with the bulk of the company's growth prospects, and ever more so, sales abroad, this makes intuitive sense. As noted above, AAPL reported $102 billion in cash abroad, an increase of $8 billion in the quarter. 

This is terrific news... if only the company could dividend, buyback or engage in any other shareholder friendly action with this cash. It can't.

How about cash held domestically? Well, as can be seen in the red bar below, domestic cash has not only stagnated in the $30-40 billion area for two years, it actually declined in the most recent quarter. And yes, this is the cash that Apple has full recourse to, and which it uses to make dividend payments out of, and to fund stock buybacks.

So yes: today's bond offering was purely driven by tax considerations, but what will happen if in the future the domestic cash flow creation continues to stagnate as the US market contracts, even as the Company's cash outflow obligations increase with every passing quarter and ever more vocal shareholders.

In summary: congratulations to Apple for its record $17 billion bond offering today. Perhaps the real question, however, is when is the next one?

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Tue, 04/30/2013 - 17:49 | 3515571 James_Cole
James_Cole's picture

They could always buy 100B of gold outside of the US, folks on here would love that!

This is terrific news... if only the company could dividend, buyback or engage in any other shareholder friendly action with this cash. It can't.

They could BUT..

Tue, 04/30/2013 - 18:13 | 3515653 bluskyes
bluskyes's picture

Better yet, buy silver, and claim that it's a hedge against rising silver prices - so that they can continue to manufacture electronics. They'd stand a better chance holding silver as a company that manufactures electronics, than the Hunt brothers did holding silver as a sugar company.

The great thing about that would be that the more silver Apple bought, the higher it would go. Plus Apple wouldn't need margin like Herbert, and William did. Just keep taking delivery.

Tue, 04/30/2013 - 18:26 | 3515678 James_Cole
James_Cole's picture

Doesn't make any sense for them to buy for manufacturing. But I like this Hunts bros idea, if only someone would suggest that at the shareholders meeting. 

Or better yet, start the rumour on here. The secret buyer grabbing up all the phys gold / silver out there? Braeburn Capital! #bullish

Tue, 04/30/2013 - 20:25 | 3516038 notbot
notbot's picture

Tyler- I don't know any investor who doesn't already know this.

When calculating an ex-cash P/E or enterprise value, you haircut offshore cash by 25-30%. Not just for AAPL, but for all US-based multinationals. Easy enough.

So AAPL has net $110bn of "recourse" cash. Not rocket science. That's still a lot of cash. And there is SOME optionality value in addition on the off-chance we get another repatriation holiday.

The hard part is the fwd earnings. And what multiple you should put on those. The cash part of AAPL's value is a cakewalk

Tue, 04/30/2013 - 17:44 | 3515583 slightlyskeptical
slightlyskeptical's picture

The question to me is who are they going to buy? I wouldn't be surprised to see them venture further into voice.

Tue, 04/30/2013 - 17:44 | 3515584 andrewp111
andrewp111's picture

Can AAPL borrow money outside the USA and use that money to pay dividends without paying tax on its overseas cash? If they borrow overseas, they could use the overseas cash to pay back the bonds, and the proceeds of the borrowing to pay dividends, or can they? What is the tax law on sneaky ways of laundering that cash back into the USA?

Tue, 04/30/2013 - 17:55 | 3515619 Tyler Durden
Tyler Durden's picture

Actually, the bulk of that cash is held right here, in the offices of Braeburn Capital in Reno, NV as we showed here and practically all of it is invested in various Treasurys, MBS and Corporate bonds and stocks. 

However, what is going on, is that in order to avoid taxation on the trades and profits, the "investor" in Braeburn is structured as a qualified Offshore LP - a perfectly legal loophole even if it didn't help Mitt Romney much in his campaign when he got into hot water for usage of precisely these kinds of tax shelters via Bain.

Maybe an even better question is what happens if and when Uncle Obama goes after Apple eventually. What will happen to the various markets in which AAPL has over $100 billion invested.

One can only hope they are very liquid.

Tue, 04/30/2013 - 18:12 | 3515648 Rainman
Rainman's picture

Oblameo going after AAPL..?? ...stop it, you're killin me !

Tue, 04/30/2013 - 18:16 | 3515655 toys for tits
toys for tits's picture

Apple and the US government have the same credit rating.  

This is strange since Apple can't force people at the point of a gun to give it money.

Tue, 04/30/2013 - 18:57 | 3515680 Cult_of_Reason
Cult_of_Reason's picture

Neither AAPL can print money nor confiscate citizen’s gold/savings.

Tue, 04/30/2013 - 18:18 | 3515663 candyman
candyman's picture

Thanks, I was just going to post that question?

Tue, 04/30/2013 - 18:43 | 3515690 Cult_of_Reason
Cult_of_Reason's picture

AAPL has bought its own debt today via Braeburn Capital (aka repatriated $17B of its offshore cash without actually paying any taxes).

Someone (Braeburn Capital?) was selling treasuries today (10-year yield mechanically spiked up from 1.638 to 1.679 within one hour in AM prior to the auction) to buy AAPL debt.

Tue, 04/30/2013 - 18:49 | 3515759 NotApplicable
NotApplicable's picture

There it is! I just knew there was a mechanism to launder that money somehow.

And with Lloyd's blessing, no worries, right?

Tue, 04/30/2013 - 20:18 | 3516029 Aurora Ex Machina
Aurora Ex Machina's picture

I made a comment ages ago about the possibility of using Braeburn to buy back stocks to turn it private if they ever needed to (do a GREP).

I assumed this kind of hi-jinks was illegal, so didn't push it in this case. If your thesis is correct, Apple just bought off Wall st. with a cut to GS and fucked the IRS right up the wazoo.

 

 

More importantly, how would the shareholders and Hedge funds react to this, if you could prove it? (And I really hope you don't have a hot tub if you're right).

Wed, 05/01/2013 - 09:27 | 3516395 Cult_of_Reason
Cult_of_Reason's picture

Most likely it was done indirectly in multiple steps using derivatives and swaps. If you examine the books, all you will find is Apple's Braeburn Capital subsidiary buying from Goldman "hedges".

BTW, it appears right before this debt offering, a couple of weeks ago, Braeburn Capital left Reno. It is no longer located at its last reported address. The office at that address is now in use by another firm, Randstad Finance and Accounting. Apple's record filings do not provide a new address. The receptionist said that she only knew the firm is no longer operating at that location and that she didn't know where it had relocated.

Nevada Business Search keeps returning an error

http://nvsos.gov/sosentitysearch/corpsearch.aspx

Tue, 04/30/2013 - 18:34 | 3515701 NotApplicable
NotApplicable's picture

Steve Jobs fought the law, and the law won. (although he did best the Cali DMV by never leasing a car for longer than the licensing grace period (6 months)).

Tue, 04/30/2013 - 17:45 | 3515585 McMolotov
McMolotov's picture

"...a majority of its cash is effectively non-recourse due to prohibitive taxation requirements..."

Apple follows the Simon Black school of thought when it comes to keeping shit overseas. It'll come back to bite them in the ass, too.

Tue, 04/30/2013 - 17:51 | 3515605 Rob Jones
Rob Jones's picture

By borrowing, Apple is admitting that its so-called cash isn't really available for shareholders. So that cash shouldn't be used when estimating Apple's share price.

Jobs left in the mid-80's and Apple was nearly bankrupt by the late 90's. So I really wonder who would be willing to buy 30 year Apple debt. I don't doubt that they will be able to sell the debt. I would just love to know who buys it.

Tue, 04/30/2013 - 18:02 | 3515628 James_Cole
James_Cole's picture

By borrowing, Apple is admitting that its so-called cash isn't really available for shareholders. So that cash shouldn't be used when estimating Apple's share price.

So-called cash lol

Does no one here understand the insane amount of cash AAPL generates each quarter? 

http://ycharts.com/financials/AAPL/cash_flow_statement/quarterly

 

Tue, 04/30/2013 - 18:13 | 3515646 ImReady
ImReady's picture

If apple is seeing rough times ahead it only makes sense for them to borrow as much cash as they can now. Should credit markets shut down again they won't be able to get it later. Smells like F in here... 

Tue, 04/30/2013 - 18:49 | 3515728 Richard III
Richard III's picture

Smells like teen spirit.

And as teens are notoriously fickle, so is the market for consumer electronics; Apple gadgets will prove to be no exception.

Tue, 04/30/2013 - 21:19 | 3516203 Aurora Ex Machina
Aurora Ex Machina's picture

Nearly half of India's 1.2 billion people have no toilet at home, but more people own a mobile phone, according to the latest census data.

Only 46.9% of the 246.6 million households have lavatories while 49.8% defecate in the open. The remaining 3.2% use public toilets.

Census 2011 data on houses, household amenities and assets reveal that 63.2% of homes have a telephone.

Analysts say the data show the complex contradictions of the Indian system.[source BBC 2012]


That was in 2012: there's been another PR push recently on the issue:

Just a few weeks ago, I flew into India to join other new media specialists and journalists with the International Reporting Project to examine issues of child survival and health. (Before I continue, I simply must extend thanks to the Bill and Melinda Gates Foundation for providing a portion of the IRP funding to make this trip possible, the School of Integrative Biology at UIUC for supporting my participation in the project and GoPro Cameras for outfitting me with a Hero3 for documentation purposes.)[source oh, and translation - he's bought and paid for from the 2.0 breed]

 

The Al Jazeera report is good too.

 

 

Why am I mentioning this? Because Indians can seemingly work without bogs, but not without phones. And Africa is Android, all the way baby.

Tue, 04/30/2013 - 18:13 | 3515651 Rob Jones
Rob Jones's picture

When I have cash in my pocket, I can spend it for groceries, gas, clothes, or give it to whomever I please. What Apple is generating is something else. Unspendable cash, kind of like monopoly money I guess. Otherwise why would they need to borrow? And it would appear that they can't even use their "cash" to buy Apple shares.

Tue, 04/30/2013 - 18:22 | 3515667 James_Cole
James_Cole's picture

It's CHEAPER for them to borrow..

They can do anything with their cash obviously, but they'd have to pay decent amount of taxes on it to bring it home. Why do that when they can issue cheap debt and keep raking in the cash? 

What aapl will eventually do with their hoard has been speculated on ad nauseam for ages. Seems they're quite content to sit on it. 

Tue, 04/30/2013 - 19:15 | 3515855 Rob Jones
Rob Jones's picture

When you borrow, you have to pay interest. If I have cash in the bank, it would be silly for me to run up a huge balance on my credit card.

Tue, 04/30/2013 - 19:31 | 3515903 James_Cole
James_Cole's picture

 

2.6% bond or ~10-30% tax on cash. Not a tough decision. The whole reason the cash is overseas is to avoid taxes.

It's like if you personally could avoid paying most of your tax holding a substantial amount of your earnings out of country and instead paid your expenses through low % credit card, paid off monthly by a much smaller amount of your income. Sure you'd pay interest but it would be negligible compared to your tax savings.  

Someone above was suggesting aapl was buying its own debt issue through its investment group, sounds dubious but would make sense if they could do it. 

 

Tue, 04/30/2013 - 20:06 | 3516007 Rob Jones
Rob Jones's picture

The downside of Apple's method of tax avoidance is that they CAN NEVER SPEND THEIR SO-CALLED "EARNINGS". I could do the same thing by quitting my job. And then I could live tax-free by borrowing against my house.

Apple calls them "overseas earnings". I call them "pie in the sky".

Tue, 04/30/2013 - 20:26 | 3516052 James_Cole
James_Cole's picture

You're not understanding the picture... They can spend the money they just can't bring it over to buy shares or pay dividend without first paying tax. The money is not just sitting in a bank account or something either.

Also, they still have a 'paltry' ~45B stateside. 

The most they'd have to pay to bring the money back is ~35B, something they're apparently not interested in doing. 

Plus they're looking at earning a whole lot more cash this year, so no, it's not like you quitting your job...

Tue, 04/30/2013 - 21:00 | 3516166 Rob Jones
Rob Jones's picture

I think that you are the one who is confused. You are confusing pre-tax income with earnings.

At the very least, Apple's overseas money and earnings should be derated by 35% to account for the taxes they would need to pay in order to get the money into the hands of their shareholders. And as long as that money is sittting there, it is burning a hole in the pockets of the Apple managers. They are very likely to blow the money on some bonehead aquisition that won't work out. A bird in the hand is worth (at least) two in the bush.

Tue, 04/30/2013 - 21:29 | 3516221 James_Cole
James_Cole's picture

I think that you are the one who is confused. You are confusing pre-tax income with earnings.

No I'm not.

At the very least, Apple's overseas money and earnings should be derated by 35% to account for the taxes they would need to pay in order to get the money into the hands of their shareholders. And as long as that money is sittting there, it is burning a hole in the pockets of the Apple managers.

Sort of but not really and no. And they're not the only company that does this. 

Let's put it this way, AAPL didn't get to nearly 150B in CASH by making stupid decisions with debt. 

Tue, 04/30/2013 - 21:49 | 3516282 Rob Jones
Rob Jones's picture

Let's put it this way, AAPL didn't get to nearly 150B in CASH by making stupid decisions with debt.

AAPL doesn't have nearly $150B in CASH. It has $150B in tax-limbo monopoly money.

Also, the person responsible for Apple's current success is dead. It is now being run by people who are much less talented than Jobs. So you cannot count on them not to make stupid decisions. Jobs left Apple in the mid-80's. Apple's hot product then was the Mac which continued to do well into the early 90's as Apple made various incremental improvements in memory, clock speed, etc. But eventually Microsoft software caught up with Mac software and Apple was on the verge of bankruptcy by the late 90's. If Apple isn't able to keep innovating, its competitors like Samsung will catch up and Apple could well find itself in the same situation once again.

Tue, 04/30/2013 - 22:13 | 3516352 James_Cole
James_Cole's picture

AAPL doesn't have nearly $150B in CASH. It has $150B in tax-limbo monopoly money.

It's not 'tax-limbo monopoly money,' there are just restrictions on what can be done with it in the USA without paying taxes. It's the same general situation with basically anyone with a lot of money and distaste for taxes. The good news is AAPL is a multinational so they can invest that money freely elsewhere. 

Also, the person responsible for Apple's current success is dead. It is now being run by people who are much less talented than Jobs. So you cannot count on them not to make stupid decisions.

Tim Cook is responsible for most of the cash hoard. 

If Apple isn't able to keep innovating, its competitors like Samsung will catch up and Apple could well find itself in the same situation once again.

Obviously true, but that's totally separate to their debt deal. 

Wed, 05/01/2013 - 02:52 | 3516905 mdtrader
mdtrader's picture

Nope generally not. Also what is this nonsense that Apple's cash should disregarded in any valuation. Even If they had to repatriated the cash they wouldn't lose all of in tax. So just value Apple's cash at a 35% discount if you want, that still leaves $94 billion and growing. Also that cash overseas could be use to make aquistions, so the idea that it should be disregarded is yet more nonsense from desperate bears, who having missed Apple all the way up from $85, will miss the next leg up too! 

Tue, 04/30/2013 - 17:53 | 3515613 CrashisOptimistic
CrashisOptimistic's picture

Why not move the company and articles of incorporation to Bermuda?  Then they are no longer a US company and are taxed only on US income, which is all they're paying tax on now anyway.

Tue, 04/30/2013 - 17:56 | 3515616 Bunga Bunga
Bunga Bunga's picture

Filthy rich but can't bring money home from overseas, therefore need a little loan. Funny, I got such an e-mail weeks ago, it was from Nigeria.

Tue, 04/30/2013 - 17:56 | 3515621 Z_End
Z_End's picture

Perhaps they will buy their own Foxxcon someday?

Tue, 04/30/2013 - 18:38 | 3515710 NotApplicable
NotApplicable's picture

Or declare themselves sovereign and start their own central bank.

Tue, 04/30/2013 - 17:59 | 3515622 buzzsaw99
buzzsaw99's picture

bondholders just jumped to the front of the line. congrats to the stupid common shareholders who just got hosed again!

Tue, 04/30/2013 - 18:15 | 3515647 Dr. Engali
Dr. Engali's picture

They hosed themselves by screaming for a dividend/ share buy back program. All the multi-nationals are following this game plan. Why they think Apple would be any different is beyond me. Eventually they will pay for their short sightedness

Tue, 04/30/2013 - 17:57 | 3515624 Rainman
Rainman's picture

The Tuth : All I do is play angry birds on my I-pad. It's a pain in the ass at everything else.....a wasted Xmas gift..... coulda got a new shotgun and more decoys... 

Tue, 04/30/2013 - 18:03 | 3515630 Dr. Engali
Dr. Engali's picture

Somewhere in the future when,Apple becomes the next Dell, they will be looking for private equity to do a leveraged buy out.

Tue, 04/30/2013 - 18:04 | 3515639 dime2962
dime2962's picture

How long before they access their line of credit? 

Can they take out a HELOC on the new sprawling complex they are building?

Tue, 04/30/2013 - 18:06 | 3515642 b_thunder
b_thunder's picture

Uncle Samobama is salivating to grab 35% of that offshore pile of cash!  No, wait, Uncle Samobama is waiting for campaign contribution donation large enough to declare another offshore tax amnesty.

 

Tue, 04/30/2013 - 18:11 | 3515645 buzzsaw99
buzzsaw99's picture

mebbe craapl should pay their taxes like everyone else

Tue, 04/30/2013 - 18:22 | 3515669 toys for tits
toys for tits's picture

Idiotic comment.  

Corporations only pay taxes indirectly, passing the embedded taxes on in the customers' price.  

Eliminate all corporate taxes and the prices for goods and services will drop an average of 20%.

Tue, 04/30/2013 - 18:31 | 3515687 buzzsaw99
buzzsaw99's picture

Eliminate all corporate taxes and the prices for goods and services will drop an average of 20%.

 

Now that's an idiotic comment!

Tue, 04/30/2013 - 19:27 | 3515885 toys for tits
toys for tits's picture

Do you think corporate taxes and the costs to comply with corporate tax law adds nothing to the final retail price? 

You're retarded.

If you do want to educate yourself and not be an imbecile, read up on the Fair Tax.

Tue, 04/30/2013 - 20:39 | 3516092 adr
adr's picture

Do you honestly think any corporation will reduce prices instead of keeping an extra 20% margin? Especially publicly traded ones.

Right now 90%+ of the MSRP of any product is various profit margins from distributor to retailer.

Tht is how a $1 piece of shit from China ends up havng a $30 MSRP at Walmart.

Tue, 04/30/2013 - 18:32 | 3515694 weyes1
weyes1's picture

Equally idiotic, I'm afraid.

Eliminate all corporate taxes and up go the profits and the dividends.  To think that these corporate "savings" would actually be passed on to the consumer, dollar for dollar, is hopelessly naive.

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