Last week Amazon.com Inc. came to the market with a USD16bn multi-tranche bond deal; proceeds of which are said to be used to fund the USD13.7bn Whole Foods Market Inc acquisition. Demand came in at USD 48bn (3x oversubscribed), just shy of Belarus’ nominal GDP! Appetite for such a deal was no surprise to the market as Amazon is afterall a household name and its stock is worth five times as much as it was just over 5 years ago; while the S&P has barely doubled. However, despite the apparent appeal of lending to the e-commerce giant, the bonds did not make it to our portfolios due to the relative unattractiveness at issue.
Amazon is rated Baa1 by Moody’s, and AA- by S&P. Moody’s upgraded its outlook for Amazon’s rating from stable to positive, with Moody’s VP Charlie O’Shea stating, ‘The change in outlook to positive reflects our view that despite the increase in debt, the Whole Foods acquisition is an immediate credit positive for the company on a variety of fronts,’ O'Shea added that the deal gives Amazon ‘greater scale’ and ‘crucial brick-and-mortar presence in a segment where it has been trying to grow’. The report also noted, however, that the rating also considers ‘the lack of transparency with respect to strategy and financial policy, the high degree of potential volatility in operating profit due to the level and cadence of investment funding for various growth initiatives, and the increased online competition from brick-and-mortar retailers.’
On a relative value basis, the 30- and 40-year tranches look to be the most attractive of the seven tranches. Issued at a spread of 125bps over US Treasuries, the 4.05% 2047 issue is currently trading at 130bps over, with a yield around 4%. Using the bond’s best rating, i.e. AA-, we calculate its expected return at 9.1% with ~2.8 notches of credit cushion (1.8 notches on a worst rating basis). If we compare that to our current holding in Microsoft 4.875% 2043, which has a shorter duration (15.5 years versus 17.2 years) and a much higher Aaa rating, we currently prefer Microsoft on a relative value basis; expected return and yield is calculated at 15% and the bond is ~5.4 notches cheap.