NEW YORK: A market has yet to materialize for credit default swaps offering protection on Apple Inc's record USD17bn bond issue, despite the enormous size of the deal.
While quotes are available and prices have been published by data vendors since May 1, activity has been negligible, with only a handful of investors attempting to make a market in the five-year maturity.
"I would think CDS will start trading at some point, but this is one of these situations where it's such a cash-rich institution that having CDS on it is less valuable," said William Larkin, portfolio manager at Cabot Money Management.
"CDS is something you buy if you think the credit will deteriorate. Apple really doesn't need CDS."
Others said the absence of volatility in secondary market trade has reduced hedging demand and made the bonds a less aggressive play for fast money. Credit default swaps offer protection against a potential default and are also used to speculate on creditworthiness.
"From the sell-side perspective, there is not a lot of interest to hedge out risk exposure on this type of name, especially since it's easier and cheaper to short with Treasuries," said a market source.
But not everyone is convinced that the bonds come without risk, especially the longer-dated 30-years, given the uncertain life-cycle of a technology company.
They caution that the view of Apple as cash-rich and liquid, an innovator that will produce must-have products for generations to come, may be hampering the development of its CDS - and that investors may end up paying the price for that.
"You cannot take out the probability of Apple's products becoming obsolete in - insert number of years - since nothing is without risk," said a swaps trader.
There are already signs that Apple's business segments are maturing.
In its latest earnings report, the company posted its first quarterly profit decline in more than a decade, and Chief Executive Tim Cook acknowledged to analysts that its once stratospheric growth had tempered.
SOVEREIGN SURROGATE
One of few technology majors with no debt on its books, Apple came to the bond market to raise funds for a USD100bn capital reward for shareholders, including a USD60bn share buyback over the next few years.
The company chose to issue bonds because borrowing rates are so low - and because it was reluctant to tap its USD145bn cash pile.
About USD102bn of that cash is held offshore and would be subjected to US corporate tax if the company were to repatriate it. But investors are assuming the company would bring that cash home in the unlikely scenario it was unable to make interest payments on its bonds.
Some market sources said that banks are likely unwilling to sell CDS protection on Apple as they are more cognizant than investors of the risks inherent in any corporate bond.
Other cash-rich technology companies have healthy CDS markets. Microsoft, for example, has been actively quoted in the five-year maturity on a daily basis going back to January 2004, according to data from Markit. Spreads tend to remain static, relative to its peers, but the name continues to see interest and pricing.
In any case, Apple's high profile seems to have won out for the time being and continues to drive traffic in cash.
Strong activity in the secondary market has some investors likening the instrument to a surrogate for US Treasuries.
"Whether you believe the economic fundamentals or not, there is no disguising the fact that the 'top' or 'best' quality corporate credits are now better graded than a number of sovereigns," said a swaps trader.
Apple garnered an AA+ rating from Standard & Poor's, the same rating the agency has assigned to the US sovereign. Moody's assigned it an Aa1 rating.
That rating has bolstered the view that the potential for event risk, or default, is minimal.
"If you take the facts at face value and what is considered to be a shortage of high-quality credit, the thinking is Apple bonds are probably a more prudent home for your cash than bonds from a sovereign," said the trader.
"Synthetic, or CDS, has become the less popular play," said another swaps trader, "especially since the cash market is so liquid, you can go in the short term and short the (Apple) bond instead of shorting the (Apple) CDS without too much work."
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