From Junk to Aa1 – Apple Gets a New Credit Rating

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On February 25, 1997, Moody’s downgraded Apple Computer’s long-term senior unsecured debt to B3. In just over one year, Apple Computer’s rating had fallen from Baa2, an investment grade rating, deep into junk territory. In the press release announcing the downgrade to B3, Moody’s had this to say:

“The steady erosion of Apple’s market share in recent years in the Windows-dominated personal computer industry — caused by aggressive competition by other PC hardware manufacturers and substantial improvements in the Windows operating system — has significantly increased business risk at Apple and has reduced the predictability of future operating results. Apple’s market share erosion has led to a substantial decline in its revenues and margins, produced a series of operating losses and restructuring actions, and weakened its historically strong liquidity and debtholder protection measurements.

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My oh my, how far we’ve come since then. The downgrade to B3 would mark the low point for the company’s debt rating. From there it would slowly but steadily climb over the next few years, reaching Ba2 in the year 2000. On December 18, 2000, Moody’s confirmed the Ba2 ratings of both Apple Computer’s $300 million 6.50% senior unsecured notes and the company itself. That would be the last Moody’s rating action on the company for more than 12 years.

Fast forward to today, and, along with its fiscal 2013 second quarter earnings report, released on April 23, Apple also announced a massive increase to its program to return capital to shareholders. The increase included a $50 billion hike to the share repurchase authorization, from $10 billion to $60 billion, and a 15% increase to the company’s quarterly dividend. In the press release announcing these changes, Apple had this to say: “In conjunction with the expanded return of capital program, the Company plans to borrow and expects to announce more details about this in the near future.”

Given the announcement that Apple plans to borrow money to help fund the capital return program, the company would need a new credit rating. After all, a lot has changed since that last Moody’s rating action in the year 2000. Beyond changing its name from Apple Computer to Apple, the company also has no debt at this time. Furthermore, its financial position is currently so strong that the question is not whether the company would get an investment grade rating, but whether the investment grade rating would be Aaa/AAA.

Both Moody’s and S&P answered that question before the business day was even over on April 23. Moody’s announced it had assigned an Aa1 senior unsecured rating to Apple, the second highest rating available. S&P likewise assigned Apple the second highest rating possible, AA+, the same S&P rating held by the U.S. government. Why didn’t Moody’s and S&P assign to Apple the highest credit rating of Aaa/AAA respectively?

Moody’s had a couple of reasons for not assigning the coveted Aaa rating: First, the “inherent long-run risks for any company with high exposure to shifting consumer preferences in the rapidly evolving technology and wireless communications sectors” means that Apple is susceptible to the “transformational changes that can lead to shifts in market leadership” due to the “rapid rise and fall of new products.” Second, Moody’s noted that Apple’s U.S. cash position is likely to decline substantially during the course of the capital return program. This could eventually lead to an increase in the company’s debt level if Apple were to extend its dividend and stock buyback programs.

In its press release announcing the AA+ rating, S&P noted the following regarding a potential upgrade to AAA: “The potential for an upgrade is currently constrained by our view of Apple’s business risk profile, which incorporates highly competitive and rapidly evolving market conditions and Apple’s earnings vulnerability to a potential delay in, or modest success of, new product introductions.”

Even though Apple was not assigned the top credit rating by either Moody’s or S&P, the Aa1/AA+ rating does not mean that when the time comes to borrow money, it will be unable to do so at very favorable spreads over benchmark Treasuries.  At that time, assuming benchmark rates are anywhere near today’s levels, the short- to intermediate-term debt will likely have an interest rate that is less than the dividend Apple pays on its stock.

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  1. I never thought about investing in Apples Bonds. They have fallen dramatically lately so I may actually purchase the stock outright.


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