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Why Amazon’s seven-part bond deal is a bargain – 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.[1]

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.

‘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.’

Jordan Chalfin, CreditSights

The early price talk was about 30 basis points wider than where Oracle Corp. ORCL, +0.88%[2] , Intel Corp. INTC, -0.50%[3] and Apple Inc. AAPL, -0.40%[4] 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.

A grocery grab

Moody’s said Monday its positive outlook “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,” Moody’s Vice President Charlie O’Shea wrote in a note.

“Whole Foods WFM, -0.10%[5] provides Amazon AMZN, -0.48%[6] with greater scale and a crucial brick-and-mortar presence in a segment where it has been trying to grow, and the almost 500 existing Whole Foods locations can be utilized to expand food delivery, as well as provide pickup points for online orders of any type.”

The investment-grade rating reflects the strength of Amazon’s cloud business, Amazon Web Services, which accounts for most of the company’s operating income, said O’Shea. The company also enjoys significant cash-flow generation and a liquidity profile that includes cash and short-term investments of more than $21 billion as of the end of June.

But the rating also reflects the lack of transparency on strategy and financial policy, the high degree of possible volatility in operating earnings as the company spends heavily on new growth projects[7], and increasing online competition from traditional retailers.

Amazon and its founder and chief executive, Jeff Bezos, are famously tight-lipped about plans. Bezos does not join his company’s quarterly earnings calls, which are usually conducted by its chief financial officer. The executive told a conference in 2014 that he spends about six hours on investor relations a year.[8] The company does not pay a dividend and has not bought its own shares since 2012[9]. In its latest quarter, Amazon missed per-share earnings forecasts[10] by a wide margin.

Read now: Amazon thrives by thumbing its nose at Wall Street[11]

See also: What Blue Apron needs to do to survive the threat of Amazon[12]

Related: Amazon is getting too big and the government is talking about it[13]

“The acquisition of Whole Foods supports the company’s credit profile as it will ‘kick-start’ Amazon’s existing grocery business and indicates a recognition that a brick-and-mortar strategy, at least in this segment, is beneficial to the company’s growth strategy,” wrote O’Shea.

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%.

Don’t miss: Amazon says new accounting rule will change the timing of when it recognizes sales of its devices[14]

More from MarketWatch

References

  1. ^ $13.7 billion acquisition of Whole Foods Market Inc. (www.marketwatch.com)
  2. ^ ORCL, +0.88% (www.marketwatch.com)
  3. ^ INTC, -0.50% (www.marketwatch.com)
  4. ^ AAPL, -0.40% (www.marketwatch.com)
  5. ^ WFM, -0.10% (www.marketwatch.com)
  6. ^ AMZN, -0.48% (www.marketwatch.com)
  7. ^ spends heavily on new growth projects (www.marketwatch.com)
  8. ^ about six hours on investor relations a year. (fortune.com)
  9. ^ has not bought its own shares since 2012 (www.marketwatch.com)
  10. ^ missed per-share earnings forecasts (www.marketwatch.com)
  11. ^ Amazon thrives by thumbing its nose at Wall Street (www.marketwatch.com)
  12. ^ What Blue Apron needs to do to survive the threat of Amazon (www.marketwatch.com)
  13. ^ Amazon is getting too big and the government is talking about it (www.marketwatch.com)
  14. ^ Amazon says new accounting rule will change the timing of when it recognizes sales of its devices (www.marketwatch.com)

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LIVESTOCK-CME live cattle rebound after bargain hunters step in – Reuters

    * Feeder cattle end up sharply
    * Lean hog market closes higher

    By Theopolis Waters
    CHICAGO, Aug 15 (Reuters) - Chicago Mercantile Exchange live
cattle futures        closed sharply higher on Tuesday, ignited
by bargain buying after burdensome supplies recently sank the
contract to eight-month lows, said traders.
    "Everybody was just overly bearish and we had lots of long
liquidation by funds pushing the market down. So we've got to
where there wasn't any more sellers," said Hales Cattle Letter
author David Hales.
    The October contract cracked the 200-day moving average of
107.247 cents, which triggered technical buying. Some investors
bought that month and sold August before it expires from trading
on Aug. 31.
    August         ended 1.000 cent per pound higher at 110.050
cents. October         closed 2.450 cents higher at 109.050
cents.
    Before Tuesday's session, bullish investors were drawn to
futures that were underpriced, or discount, to last week's cash
or market-ready cattle in the U.S. Plains that fetched $114 to
$116 per cwt.
    So far this week packer bids for cash cattle were at $110
per cwt with sellers asking $115 for their animals, said feedlot
sources.
    Processors will resist bidding up supplies given 12,000 more
animals for sale than last week and as wholesale beef demand
struggles to carve out a seasonal bottom, said traders and
analysts.           
    They await Wednesday's Fed Cattle Exchange (FCE) sale of
1,184 animals to set the tone for the overall cash trade in the
Plains this week. Cattle at the FCE last week fetched $114 to
$115.50 per cwt.
    CME feeder cattle        gained for a third consecutive
session driven by technical buying, lower corn prices and live
cattle futures' turnaround.
    August feeders         closed 3.050 cents per pound higher
at 145.350 cents.
    
    HOGS CLOSE FIRMER
    After CME August lean hogs expired on Monday, remaining
contracts benefited from their sizable discounts to the
exchange's hog index for Aug. 11 at 84.78 cents, said traders.
    They said buying in the neighboring cattle market helped
support lean hog contracts.
    October         ended 1.350 cents per pound to 70.525 cents,
and December         finished up 1.200 cents to 64.700 cents.
    Futures made headway despite the seasonal supply increase
that kept a lid on cash hog and wholesale pork values, said
traders.         
    Monday and Tuesday's combined hog slaughter totaled 892,000
head, 72,000 more than the same period a week earlier and 31,000
more than a year ago, according to U.S. Department of
Agriculture estimates.

 (Reporting by Theopolis Waters; Editing by James Dalgleish)
  
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