Amazon.com is the latest big name to dive into the corporate bond pool this year, joining AT&T, Tesla, Microsoft, Duke Energy, Aetna, UBS, Verizon and others.
The online retail giant (whose chairman Jeffrey P. Bezos owns The Washington Post) sold $16 billion this week to finance its acquisition of Whole Foods Market.
Amazon preferred to borrow money at low interest rates over as long as 40 years instead of tapping its $21 billion cash hoard.
So why did Amazon borrow when it could pay for the purchase with stock, or cash or with its $10 billion in annual cash flow?
“It makes sense,” said Rajeev Sharma, director of fixed income at Foresters Financial. “Amazon is taking advantage of the fact that their debt profile is really manageable. They have a little over $8 billion, which is nothing for a company this size.
“Investors have been craving a name like this,” Sharma said. “A high-quality name. It seems at the long end (30 years-plus) of the bond market, utilities are extremely rich. Energy is volatile. You have this opportunity to buy a high-quality name, and investors have been kind of starved for that.”
And Amazon.com most surely doesn’t want to use cash because having a “battleship balance sheet” of $21 billion makes shareholders breathe easier and gives the company flexibility to make future acquisitions or endure downturns.
“Amazon doesn’t want to issue stock to make the purchase because that would introduce dilution,” said David Kass, finance professor at the University of Maryland. Besides, Kass added, “now is a sweet spot for debt. Interest rates are likely to rise.”
The Amazon issuance will have very little effect, if any, on the average individual investor who might own bonds through mutual funds.
Some of us might end up owning a small piece through a bond index mutual fund or exchange-traded fund. I own several bond mutual funds, which I view as hedges against the day when stocks, as they inevitably do, shift into reverse.
Direct purchasers of the Amazon bonds, which vary from three-year maturities to 40 years and with varying yields, are likely to be institutional holders such as insurance companies, according to experts. An insurance company would put the low-yield Amazon bond on its balance sheet to offset a liability like a defined benefit plan.
“There are constituencies that have very long expectancies and/or liability streams,” said Jay Weinstein, a managing director at Bronfman Rothschild Wealth Advisors in Rockville, Md. “They think very differently than you and I might. For instance, if you are an insurance company or pension fund with a 40-year, 4 percent liability, you might think these are not so terrible, though of course you have to take on the credit risk.”
But let’s say you buy some 40-year Amazon bonds that mature in 2057. Those bonds provide an annual yield of 4.25 percent. You are betting that inflation, which has been tame for the past two decades, is not going to rear its ugly head and decimate your 4.25 percent yield. That is quite a bet.
“I don’t know why anybody would want to take the risk of 40-year bonds on Amazon if you could buy the equity,” said Jamie Cox, managing partner at Harris Financial Group in Richmond. “It seems like such a bad deal, which is why Amazon is doing it. You get none of the upside and all the risk.”
“Fred and Ethel should not buy this bond or even think about it,” said Washington investment manager Michael Farr. “Forty-year debt at 4-point-something interest is great for Amazon. It’s hard to think about how it is going to work out well for the retail investor.”
Weinstein said there have been some fortunate exceptions to that rule.
“I am old enough to remember the 100-year Disney issue that my Google Machine tells me was 1993,” Weinstein said. “Everyone thought the buyers were 100 percent loony. Currently, the bonds are up 22 percent from the offering price and have clipped 7.55 percent coupons every year for 24 years. That’s been pretty darned good. So you never know.”