At least one Apple (NASDAQ: AAPL) bond issue is now trading at 68 cents on the dollar. In certain circumstances that is seen as a distinct negative for the associated equity stock. It does though depend upon those circumstances.
When a company is in distress then we do indeed see bond prices like this. 60 or 70 cents on the dollar (here, $68.595 per $100 nominal) is an indicator that if the company were liquidated then the bondholders would not gain full recovery. That then also means that the equity is going to be about worthless.
This isn’t what we think might be true of Apple stock – that it’s about to be worthless – so what is it that’s going on here?
For we really don’t think that Apple would be unable to pay off its bond issue in liquidation. Far from it, the company is sitting on vast piles of cash, far in excess of any borrowings. So, what’s happening here?
What’s happened is that inflation and interest rate expectations have changed, not anything about Apple’s creditworthiness.
It’s worth reminding ourselves about why Apple borrowed in the first place. It has been making massive profits since the introduction of the iPhone. It simply should need to borrow at all – certainly not for the long term. But this was to ignore the effect of tax laws.
Apple has always just paid the American domestic corporate income tax as asked. No games, not special structures, just paid it. With its offshore income, this was rather different. Tax law enabled it to shuffle those foreign profits into Ireland, where they were barely taxed – from there they went to Bermuda where they weren’t taxed at all. However, if they then went into the US they’d pay the full American corporate income tax – which was 35% back then. So, they stayed in Bermuda.
But the aim of being a company at all is to make the shareholders richer. That means either paying them a dividend or buying back stock. But the money in Bermuda couldn’t be used to do that – not without paying corporate tax at 35% it couldn’t. So, Apple borrowed on long bonds to pay dividends and to finance stock buybacks. The money in Bermuda could be seen as backup for those borrowings, security even if not in a formal sense of being pledged.
As interest rates rise – the Fed raised them half a percent, recall – and inflation estimates rise off into the future then clearly bond prices will fall. This specific Apple bond is the 2060 issue paying a coupon of 2.55%. Both inflation and interest rates are thought to be higher now than they were at the time of issuance. So, the yield to maturity is currently 4.21%. That is the same thing as saying that the current price is 68 cents on the $ – eyelids and prices move in opposite directions on bonds of course.
What this doesn’t show is any nervousness about Apple’s creditworthiness – a 4.21% yield to maturity on 38-year money isn’t showing any of that at all. This is purely that inflation and interest rates elsewhere affect.
So, an Apple bond at 68%? This isn’t a signal of disaster at all, no. Well, not of any impending problem at Apple it is, that is. Those who bought this bond at the 104% issue prices are a little green around the gills but the implication for the Apple stock price isn’t negative, no.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.