Amazon taps into cheap debt markets to raise $10 billion
Many companies have tried to strengthen their balance sheets in the face of the ongoing COVID-19 pandemic, which has created considerable global macroeconomic uncertainty. After other bond issues in the technology sector such as T-Mobile and Apple These last months, Amazon.co.uk (NASDAQ:AMZN) this week also tapped debt markets to access cheap capital, with the e-commerce giant raising $10 billion at record rates.
Here’s what investors need to know.
Image source: Amazon.com.
Cheap paper
Amazon issued $10 billion in callable bonds in six different tranches with maturities up to 40 years. The document has obtained investment grade ratings from major rating agencies. The company intends to use the proceeds for general corporate purchases, which could include paying off other debt, stock buybacks, acquisitions or capital expenditures, among other potential uses.
|
Main |
Coupon |
Maturity |
|---|---|---|
|
$1 billion |
0.4% |
June 2023 |
|
$1.25 billion |
0.8% |
June 2025 |
|
$1.25 billion |
1.2% |
June 2027 |
|
$2 billion |
1.5% |
June 2030 |
|
$2.5 billion |
2.5% |
June 2050 |
|
$2 billion |
2.7% |
June 2060 |
Data source: SEC filings.
The 0.4% interest rate represents a record high for a corporate bond issue, thanks in part to strong investor demand for the bonds as supply was reportedly oversubscribed.
Compare these prices to those of Apple $8.5 billion bond issue last month alone, which had similar deadlines:
|
Main |
Coupon |
Maturity |
|---|---|---|
|
$2 billion |
0.75% |
May 2023 |
|
$2.25 billion |
1.125% |
May 2025 |
|
$1.75 billion |
1.65% |
May 2030 |
|
$2.5 billion |
2.65% |
May 2050 |
Data source: SEC filings.
In recent months, the Federal Reserve has injected liquidity into the financial system in an effort to stimulate the economy with low interest rates. Additionally, the Fed took the unprecedented step of buying corporate bond ETFs, effectively helping to support the corporate paper market, before proceeding tobuy bonds directly through the program.
What Amazon has invested in
Amazon had about $49.3 billion in cash and $23.4 billion in long-term debt on the balance sheet at the end of the first quarter. The company has invested heavily across the business. Prior to the coronavirus outbreak, Amazon had invested hundreds of millions of dollars in one day delivery.
As the public health crisis intensified and created a surge in e-commerce demand as consumers stayed home, Amazon hired 175,000 seasonal workers to respond to this request. Last week, the company announced that it would offer full-time positions to 125,000 of these employees. Additionally, Amazon must invest in worker safety following criticism that it was not doing enough.
In the latest earnings call, Chief Financial Officer Brian Olsavsky estimated that Amazon invested $600 million in COVID-related costs in the first quarter, with those expenses expected to climb to more than $4 billion in the second quarter. This 10 billion dollars will certainly be useful.
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