Amazon.com is the latest tech giant to tap debt markets to borrow a large sum that it doesn’t appear to need.
The company sold $18.5 billion of bonds on Monday across eight different tranches, according to Bloomberg. It was its first time borrowing from capital markets since June 2020, when it sold roughly $10 billion in debt. The smallest tranche in the offering, $1 billion in fixed-rate two-year bonds, will be used for sustainable projects, and while Amazon.com (ticker: AMZN) said it won’t knowingly invest in “greenhouse gas intensive projects,” it also allowed for “significant flexibility in allocating the net proceeds” of that portion of the sale.
The offering comes a little more than a week after Amazon’s latest quarterly earnings report, when it announced that it had $73 billion of cash and marketable securities on hand. That raises the question of why it decided to take on the extra $18.5 billion of debt in the first place.
Looking at Amazon’s filing doesn’t provide much extra insight. Other than the sustainability bond, the company said it would use the cash for “general corporate purposes,” similar to the prospectus from its bond sale last year.
But going by the response from the financial world, the company had plenty of room to take on more debt. Its bond sale was reported to be originally targeted around $15 billion, according to Bloomberg, but then got increased to more than $18 billion.
What’s more, Moody’s made the somewhat unusual move of upgrading a company’s credit rating on news it is taking on more debt. The credit-ratings firm boosted its rating on Amazon by one notch to A1, its fourth-best rating, on Monday.
“The new debt offering will be used to support Amazon’s myriad growth investments. While it temporarily increases leverage, it is expected to be deployed over time for growth [capital spending], which is a long-term positive,” wrote analyst Charles O’Shea in the upgrade note.
Markets themselves are providing good reasons to borrow as well. First, Treasury yields still remain relatively low compared to history, and have declined since the end of the first quarter. The 10-year yield is trading around 1.6%, and inflation-adjusted Treasury yields are still well below zero.
Second, companies’ relative borrowing costs have declined to near post-financial-crisis lows. The spread between investment-grade bond yields and Treasury yields is just 93 basis points, or hundredths of a percentage point. That is approaching the post-financial-crisis low of 90 reached in early 2018.
Analyst Jordan Chalfin from CreditSights said that Amazon’s bond sale will likely be used to invest in its business, specifically the delivery part of its supply chain. And he hinted that a deal could be in the works, if the U.S. government is willing to cooperate.
“The company is making significant investments across its business this year, notably in transportation,” he wrote. Further, “Amazon has a large appetite for [mergers and acquisitions] although the regulatory environment could pose challenges on that front.”
Write to Alexandra Scaggs at alexandra.scaggs@barrons.com
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May 11, 2021 at 04:09AM
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Amazon Added $18.5 Billion to Its Debt Load. Moody’s Raised Its Rating Anyway. - Barron's
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