Moody's Places 'P-1' Short-Term Rating on Apple, Inc. (AAPL); Sees Issuance of Up to $10B in CP

Moody's Investors Service assigned a P-1 short term rating to Apple Inc. (Nasdaq: AAPL), and affirmed the Aa1 senior unsecured debt rating. Moody's expects Apple to issue up to $10 billion of commercial paper, which the company will use to manage its short term cash needs. Moody's notes that Apple will not have a bank backstop liquidity facility in place, and will rely instead on its very high cash and investments balances, including U.S. cash, to meet commercial paper maturities if needed. The lack of a committed backstop liquidity facility is very unusual among U.S. non-financial corporate issuers, despite Apple's uncommonly large cash holdings. The rating outlook remains stable.

RATINGS RATIONALE

Apple is expected to generate an increasing portion of its cash flow outside of the U.S., while the large financing outflows -- particularly dividends, share repurchases and some portion of capital expenditures -- will remain within the U.S. Moody's analyst Gerald Granovsky said, "Based on estimates of the decline in domestic cash, Moody's estimated that Apple could borrow an incremental $25 billion to fund the share purchases. This should be accommodated within the expectations of the Aa1 long term rating."

However, the company just increased its stock buyback authorization by an incremental $30 billion (to $90 billion) through the end of calendar year 2015. Funding for this additional amount is expected to be through cash or additional debt. However, if debt going forward is increased meaningfully more than the $25 billion now expected by Moody's, that would be credit negative and could pressure the long-term rating down.

The P-1 rating reflects Apple's very strong financial position and liquidity, as cash, cash equivalents and investments totaled over $150 billion (with about $18 billion, or 12%, within the U.S.) as of March 29, 2014. Given Moody's expectations of relatively high commercial paper issuances, Moody's expects Apple to prudently manage the commercial paper maturities and ensure that sufficient domestic cash will be immediately available to be the primary source of liquidity to meet maturing commercial paper obligations. With cash immediately available, Apple should have the flexibility to monetize its longer-dated or foreign-held investments in time, if the need arose.

Outlook

The stable outlook reflects Moody's expectations that Apple will continue to maintain and defend its very strong market position in mobile devices and tablets as well as expand its addressable market to new regions and carriers. The stable outlook also incorporates the expectation that Apple will continue to maintain a very high net cash balance and a lowly levered balance sheet.

What can move the rating up

The long term rating could be upgraded if Apple sustains its strong business execution and cash generation, and there is tangible evidence that the company's ecosystem cements the users to its products upon subsequent updates and new product introductions ensuring sustainability of profits and cash flow. Ratings could also be upgraded if changes in US corporate tax laws or other mechanisms would allow the company to repatriate cash on a more tax efficient basis and this leads to sustained low debt levels rather than using debt to fund cash returns to shareholders. However, given the industry risks inherent in the rapidly evolving technology and wireless communications sectors, Moody's does not expect upwards rating movement over the intermediate term.

What can move the rating down

The long term rating could be downgraded if there is deterioration in Apple' core business model and we expect sustained erosion in its very strong market positions, profitability or cash flow generation. If management adopts substantially more aggressive financial policies that weaken its very strong liquidity position and we expect leverage could rise, the ratings could also be downgraded.

Assignments/affirmations:

..Issuer: Apple Inc.

....Senior Unsecured Commercial Paper, Assigned P-1

....Senior Unsecured, Affirmed Aa1

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