Investors hit hard as Apple bonds tank

Thu Jun 20, 2013 5:49pm EDT
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By Danielle Robinson

June 20 (IFR) - Investors in Apple's record U.S. $17 billion bond deal have suffered some of the biggest losses in recent investment-grade new issues, with about $760 million wiped off the value of longer-maturing Apple securities that they bought just weeks ago.

The prices of the Apple $5.5 billion 2.4 percent 10-year and the $3 billion 3.85 percent 30-year bonds have plunged so much since the deal priced on April 30 that it would take about three years of earned interest from the coupons for investors to cover their losses.

"Basically if you own this paper, you're sitting on it for three years or selling at a loss," said Rajeev Sharma, senior portfolio manager at First Investors Management, who bailed out of his position in the 10-year at a loss some weeks ago. T

he staggering losses are a painful lesson to the vast number of unhedged total return investors that it takes more than just being comfortable with credit risk to play in the corporate bond markets.

The 10-year note was trading on Thursday at $92.50, close to 7.5 points lower than where it was issued. At 95 basis points over Treasuries, its yield spread has widened 20 basis points from the 75 basis points at issue.

The 30-year has suffered even more, with a more than 12-point loss in dollar price. It was quoted at $87.60 and at a spread of 110 basis points, or 10 basis points wider than its 100-basis points level at launch.

"This deal is great for shareholders because of the tight coupons Apple locked in to pay for dividends and share buybacks, but everyone who didn't hedge out rate risk - the Moms and Pops who have money in total-return funds - are looking at dollar losses that will suck up a lot of coupon payments," said one senior manager of a bond syndicate desk who was not involved in underwriting the deal.

Apple attracted a record 2,000 orders worth $50.2 billion from 900 investors when it made its debut in the bond markets in late April, when the 10-year Treasury rate was 1.67 percent versus 2.4 percent today.   Continued...

An Apple logo is seen at the Apple Worldwide Developers Conference (WWDC) 2013 in San Francisco, California June 10, 2013. REUTERS/Stephen Lam