Out on a Limb (A Periodic Series): Is Apple Issuing Eurobonds to Finance Apple Watch Production?

ADVANCE DISCLAIMER NOTE: This is only “for fun” home game speculation. Author is not a financial or bond market expert. Obviously. You may well disagree with this “thought exercise” for good reason.

So you’ve probably heard the news that Apple entered the bond market again. No big surprise.

It was denominated in euro, making it Apple’s first international debt issuance (that I know of). Also no big surprise. Apple mentioned, via CFO Maestri, that it would do this during the April 2014 earnings conference call (courtesy Morningstar, the last such transcript they made, sigh).

The bond issuance, per the WSJ and others, is advantageous because of apparently-better-than-USD-denominated bond interest rates. Still no big surprise.

The Eurobond issue seeks to raise 2.8B euro, or about $3.5B in USD.

Should that surprise? A bit more on that later.

The Nuts and Bolts of Not-Dollars and Cents (and Sense)

There’s mundane, perfectly logical reasons for Apple suddenly issuing eurobonds. Diversity of bond investors. Tapping into new credit markets. Er…converting its newly acquired euros right back into dollars, and “pocketing the difference” in more favorable interest rate terms at the end of the day? Actually…sure! Compare, for instance, the 1.671% yield on Apple’s 2026 maturity Eurobonds to the 3.45% interest rate on the 2024 USD-denominated corporate bond.

But let’s go Out on a Limb™ just a bit and see if there might be another, potentially more interesting, reason for Apple’s sudden foray into Eurobonds.

Why Eurobonds? Investopedia seems to have a nice summary, though I can’t vouch for its accuracy. I’ll point out two paragraphs (all brackets are mine):

Why a Company Might Issue a Eurobond
Many major MNCs, (for example, Wal-Mart) that want to expand to another market on a large scale (say, [the European Union]) would need plenty of that country’s currency (in this example, [euro]) and plenty of time in order to reach their goal.

Hmm. There’s also another benefit:

Risk Reduction
By issuing the eurobond in [euro] the U.S.-based parent does not have currency risk because its [euro] liability (the bond) is offset by a [euro] asset (its internal loan). Similarly, the [European] subsidiary’s liability to pay interest in [euro] to its parent is matched by [euro] income from its local [operations].

So, assuming Investopedia is at least generally correct (seems so, but please feel free to comment or tweet at me if you disagree), borrowing in euro eliminates currency risk in euro terms, and any interest repayment in euro can be made by Apple’s euro profits in Eurozone countries.

A European Flair

I’m sure you’ve already figured out what I’m getting at (I didn’t bury the lede at all, as you can see in the title), but I’ll repeat it anyway – maybe Apple wanted to expand into the European market on a large scale.

Why, exactly? It sources mostly from the US and Asia, right? It assembles mostly in China, right? Seems that way, though some Macs are assembled in the US and Ireland, and some iPads and iPhones are assembled in Brazil (olá!). Result? $180B+ revenues per year at current trajectory, and climbing.

Sorry if this somehow offends anyone, but as much as I personally am just fine (maybe, too fine?) with having my precision-engineered, generally-very-well-put-together iPhone assembled in China, a watch is not a Mac, iPad or iPhone. Credit Suisse’s apparently public report (page 7) isn’t a bad starting point to drive this point home. There’s also any number of luxury watch ads you’ve seen over the years.

If it were me? As a former, and thoroughly unrepentant, Casio wearer – I could care less. But I’m not necessarily the $349-and-up target market here 😀 – and many denizens of that higher-end timepiece market couldn’t care more. Sure, Apple’s learned, crafted and designed its way to seemingly effortless elegance. But the watch world is a different world, with different expectations, and – fair or unfair – pedigree. And that pedigree is European. And to be more specific, generally Swiss.

Which is not to say that Apple won’t manufacture quite a few of its watches, or even assemble a large fraction of them, in China. Apple Watch Sport, after all. But sourcing is another matter.

So as to not sound like an Apple catalog, I’ll keep this part short. As you can read here, Apple’s Milanese Loop band is specifically woven “on specialized Italian machines”. The “modern buckle” is sourced from “[a] small French tannery established in 1803”. The “leather loop” is “Venezia” leather, “handcrafted in Arzignano, Italy”. The “classic buckle” is sourced from “the renowned ECCO tannery in the Netherlands”. Italy, France, Netherlands. Yup, all Eurozone countries. And I wouldn’t be surprised if the 18K gold alloy casing has some origins in a Eurozone country as well. Even before you consider the possibility of actual Apple Watch production and assembly facilities somewhere in the Eurozone, in Apple Europe’s domain, you can see where having a decent euro reserve on hand could be useful for initial Apple Watch financing.

Euro Credit Line or Just Another Domestic Capital Return Program Funding Source?

I know, you have questions and/or objections. I’ll address what I think are the two (or three) major ones.

“Why bother raising euro when Apple has the necessary cash flow, and gajillions in offshore profits, from operations?”

That’s a very good point. Since Apple is obviously quite profitable in Europe – and racked up $35B+ in sales each of the past three fiscal years (ex-Retail).

Thing is, Apple’s current cash holding structure isn’t very currency-diverse (2014 10-K page 37, emphasis mine):

As of September 27, 2014 and September 28, 2013, $137.1 billion and $111.3 billion, respectively, of the Company’s cash, cash equivalents and marketable securities were held by foreign subsidiaries and are generally based in U.S. dollar-denominated holdings.

I have no doubt Apple will adjust this policy as necessary. And it goes without saying that Apple clearly can fund Europe operations and retain more euro currency over time. Still, seems quite prudent to establish a 2.8B euro ready reserve, particularly to help launch something as ambitious as Apple Watch.

“But this could just be an alternate currency source for Apple’s ongoing domestic capital return program right? And wouldn’t it be more complicated to raise euro to then lend to Apple Europe?”

Also a very valid point. Addressing the second part first, while parent-to-subsidiary lending is probably well within the bandwidth of a multinational megacorp like Apple, it does seem more complicated than needed. Apple Inc. “US” probably wouldn’t deploy the euro assets directly for Apple Europe, right? (Please feel free to chime in anytime, readers.) On the other hand, Apple Inc. is the core corporate entity, the one with the bond-raising history and very solid credit rating. So it only makes sense for it to be the primary debt-raising entity.

As far as capital return currency multisourcing – it’s possible. The more Apple does this, the more likely that’s the case. Then again, Apple is specifically allowed to use the borrowed funds any way it wants. And notably, it “only” allocated $3.5B (USD equivalent) to raising euro – fairly modest in light of Apple’s prior bond issues and the more favorable interest rates it can presumably receive vs. USD-denominated bonds.

My out on a limb guess is that Apple’s Eurobond issue may not be the “more cash to fund buybacks and dividends debt sale” it first appears. Time may tell, or it may not. The 2.8B euro may well serve two or more key purposes. Feel free to leave a comment below or on Twitter.

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