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Think different: Apple's $17B debt offers stark contrast to 1996's junk bonds

17 years ago, Apple was on the brink of disaster, and its junk bonds reflected the unease over its future with Windows dominant

May 2, 2013 06:39 AM ET

Computerworld - Apple's record-setting $17 billion bond offer this week stood in stark contrast to the company's darkest days, when in 1996 its millions in notes were rated as junk because investors wondered if the company would survive a thrashing by Microsoft.

On Tuesday, Apple filed a prospectus with the U.S. Securities and Exchange Commission (SEC), outlining what numerous media outlets, including the Wall Street Journal, the New York Times and Bloomberg reported: That Apple would issue $17 billion in low-interest bonds to finance part of its stock buy-back and larger-dividend strategies.

Those bonds, part of a record corporate offering, were scooped up as investors rushed to add them to their portfolios.

According to Goldman Sachs and Deutsche Bank, the financial houses that underwrote the sale, Apple's offer generated about $52 billion in investor demand. Moody's Investors Service and Standard & Poor's gave Apple their second-highest ratings, "Aa1" and "AA-plus," respectively, but citing increased competition and uneasiness about future products, neither awarded the company their coveted "AAA" ratings.

How times have changed.

In early 1996, Standard & Poor's downgraded Apple's bonds to below investment grade, meaning they were tagged with the notorious "junk bond" label, and thus out of bounds to some investors, such as trusts. Moody's followed in March 1996 with a downgrade of its own, citing, among a whole host of factors, "a growing destabilization of its operating results, business position, and financial profile resulting from the company's increasing isolation in the Windows-dominated, IBM-compatible personal computer industry."

In particular, Moody's knocked Apple's financial future because of the onslaught of Windows, the graphical user interface (GUI) from bitter rival Microsoft. "Apple's products no longer can support premium pricing to its competitors because advances in Microsoft Corp.'s Windows operating system have substantially eroded Apple's Macintosh operating system's historic ease-of-use advantage," noted the credit firm.

Both Standard and Poor's and Moody's were also reacting to a poor 1995 fourth quarter, for which Apple reported a loss of $69 million even as revenue grew 11% year-over-year to $3.15 billion.

To repeat: How times have changed.

Later in 1996, Apple issued and sold $575 million in junk bonds that were to mature in 2001 and pay 6% interest, just under the then-current U.S. Treasury note five-year rates. Those bonds were "convertibles," in that they were convertible into Apple shares at $29.20. The year before, Apple had floated hundreds of millions in five-year bonds paying 6.5%.

Not this time. According to Tuesday's prospectus, Apple will pay interest of just 1% -- albeit in a vastly different debt market than 17 years ago -- for its five-year notes, less than half that for the shortest-term bonds that mature in 2016, and 3.85% for its 30-year bonds.

But then, Apple was in a very tight corner in 1996, the year before the board of directors ousted CEO Gil Amelio and named co-founder Steve Jobs as interim chief executive.

"They were a mess," said Ezra Gottheil, analyst with Technology Business Research, citing declining sales, product chaos and a near-death experience for the company in the mid-1990s.

By all accounts, Apple was close to dissolution, with rumors flying of its breakup, to be parceled out to bidders, or its wholesale acquisition by any number of buyers, including Sun Microsystems, at the time a major player in workstations and servers that was poised to reap massive rewards from the emerging Internet. In a Jan. 31, 1996 story by the New York Times, for example, an Apple stock slide was attributed to news that acquisition talks between Sun and Apple had stalled.



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