Unsecured bonds worth $16 billion have been sold by Amazon. Most of the proceeds from the bond sale will be used in funding the Whole Foods acquisition. This is the first time that Amazon is turning to the bonds market since 2014. The bond sale was managed by JPMorgan Chase, Goldman Sachs Group and Bank of America.
Amazon’s bond deal is the fourth-largest this year after Microsoft’s $17 billion offering, British American Tobacco’s $17.25 billion offering and AT&T’s $22.5 billion offering. Once the acquisition of Whole Foods is completed, Amazon is expected to bring down prices at the organic-food retailer as it tries to entice more middle-income and low-income shoppers. This is expected to result in a price war despite the fact that the sector already operates in an environment with persistent deflation and on razor-thin margins.
Though Amazon already has over $21 billion in cash reserves as well as in other short-term investments, the online retail giant turned to the bond market because it needed to conserve cash. Another incentive that made Amazon turn to the bond markets was the prevailing low interest rates.
“This route is cheaper and gives them flexibility. The expansion plan Amazon has gotten on with buying Whole Foods is just the beginning, not the end,” said Jitendra Waral, an analyst at Bloomberg Intelligence.
Changing consumer habits
Among those who will find the bonds attractive are investors who want a stake in Amazon but don’t want to buy the stock since in the last five years it has quadrupled in price in contrast to the S&P 500 which has not even managed to double. Part of the reason why the Amazon bonds are attractive is because it is a rapidly growing company in a sector that has yet to reach its full potential. This is because more and more consumers are turning to shop online instead of brick and mortar stores and this trend is strong and unlikely to end anytime soon.
Amazon’s bond issuance coincides with similar moves by other tech companies. This includes Apple which sold a Canadian-dollar bond on Tuesday as well as Tesla which had a debut offering last week. The bond sale from Amazon also earned the world’s biggest online retailer better ratings as the debt has been upgraded from underperform to outperform by CreditSights. Moody’s Investors Service rates the bond as Baa1 while S&P Global gives it four notches higher.