Why Amazon’s seven-part bond deal is a bargain

Amazon sold $16 billion of bonds in a seven-part deal to finance its $13.7 billion acquisition of Whole Foods, and analysts were upbeat.

Source: MarketWatch

Amazon.com Inc. on Tuesday completed a $16 billion bond deal to fund its planned $13.7 billion acquisition of Whole Foods Market Inc.

The issue came a day after ratings agency Moody’s Investors Service assigned the deal a Baa1 rating and revised Amazon’s credit outlook to positive from stable. S&P Global Ratings assigned the credit a higher rating of AA-minus last week.

Amazon raised $16 billion in a seven-part offering that included a 40-year tranche, underwritten by Bank of America Merrill Lynch, Goldman Sachs and J.P. Morgan Chase.

As expected, the bonds priced at the tight end of guidance, but the new concessions were still attractive, according to research firm CreditSights, which had upgraded its recommendation on Amazon’s bonds to outperform from underperform based on the initial price talk.

Initial price talk on the 10-year tranche was 110 basis points above comparable Treasurys, which later tightened to Treasurys plus 90 basis points. CreditSights analysts led by Jordan Chalfin said at the price, the notes were still a bargain.

The early price talk was about 30 basis points wider than where Oracle Corp, Intel Corp. and Apple Inc. bonds are currently trading, said Chalfin, and Amazon debt should trade relatively in line with those. CreditSights classifies Amazon as a tech company, given the strength of its cloud business, Amazon Web Services, which contributed all of its operating profit in the last 12 months.

“As such, we would buyers if the 10-year bonds came at Treasurys plus 80 basis points or wider,” he wrote ahead of the pricing.

The other six tranches also tightened at pricing, with the 40-year pricing at 145 basis points over Treasurys, compared with initial price talk of 160 to 165 basis points over Treasurys, according to CreditSights.

The Amazon effect

Amazon has $8.746 billion in debt, according to FactSet, $8.25 billion of which is in the form of notes and bonds. The company’s most active bonds, the 3.800% notes that mature in December 2024, were last trading at 106.23 cents on the dollar, compared with 107.28 cents on the dollar on Monday, according to MarketAxess.

CreditSights said the existing debt would likely come under pressure, as the new notes are offering an attractive entry point given the premium built into older issues, all of which are trading at high dollar prices.

“While the 7s, 10s, and 20s seem the most attractive, we are comfortable buying Amazon’s bonds across the entire curve give its strong operating trends and competitive position in both its e-commerce and cloud computing businesses,” said Chalfin.

The biggest risk for investors in the debt is that Amazon is still in a strong investment phase, especially in its international business, which is squeezing profit and margins. The fact that the company is doing the bond deal when it could finance the Whole Foods deal with cash on hand suggests more M&A may be coming, a risk factor also highlighted by S&P Global.

“However, we think the attractiveness of the new issues and overall credit profile more than offset those risks,” said Chalfin.

The positive outlook reflects the expectation that the integration of Whole Foods will be managed well and that AWS will continue to grow and yield big profits.

In the equity market, Amazon shares were flat Tuesday, but have gained 31% in 2017, while the S&P 500 has risen 10%.