Why Apple’s Borrowing Practice Carries Risk



Borrowing to pay dividends

Despite having more than $250.0 billion in cash, Apple (AAPL) maintains a practice of borrowing and using funds for activities such as paying dividends, repurchasing shares, and making strategic acquisitions.

Since the bulk of Apple’s cash balance rests in offshore accounts, the company views borrowing as a low-cost way to raise funds rather than to repatriate its cash at a corporate tax rate of nearly 35%.

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US companies hoarding $2.4 trillion overseas

Besides Apple, other large technology companies such as Cisco (CSCO), Microsoft (MSFT), Alphabet (GOOGL), and Oracle (ORCL) are also holding billions of dollars in overseas accounts. These companies also resort to borrowing to raise the funds they need for acquisitions and other priorities.

According to TheStreet, citing Moody’s Investors Service, Apple’s borrowing has driven its long-term debt to more than $100.0 billion when corporate papers and operating leases are considered. That’s still lower than its cash balance, let alone its assets.

A recent Swiss Bank UBS report showed that based on its analysis of 4Q16 filings, US corporations were hoarding ~$2.4 trillion in offshore accounts. Microsoft, with $124.0 billion outside the United States, was keeping the most cash overseas among its S&P 500 peers.

Risk of credit rating downgrade

However, while Apple enjoys a strong positive credit rating from Moody’s, TheStreet argues that this could change if Apple’s debt continues to rise. In other words, rising debt could cause Moody’s to cut its credit rating on Apple.

A credit rating downgrade could erase Apple’s advantage of living on debt instead of repatriating its offshore cash. When ratings fall, borrowing becomes more expensive. In Apple’s case, a company whose bank account is packed with more than a quarter of a trillion dollars will likely struggle to justify to its investors why it’s borrowing so expensively.


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