Amazon.com Inc. is selling bonds to buy and refinance debt, as the cheap borrowing costs prove too tempting for an organization with tens of billion dollars in cash to resist even more.
According to people with knowledge of the matter, the online retail giant is committing $18.5 billion in debt in eight parts.The longest part, a 40-year security, will yield 95 basis points over Treasuries after discussing initially around 115 basis points said people who asked not to be identified because of the details are private.
Companies have been taking advantage of the low bond markets and spreads at three-year low rates to score cheap borrowing, even if they don't need it.With the economy recovering from the pandemic, US investment firms are increasingly tempted to spend their money cushion on acquisitions and dividend hikes or borrow even more.
With $18.5 billion, it's Verizon Communication Inc.'s biggest bond sale ever and the second-largest this year behind Amazon & Sally's $25 billion offerings in March.The company was originally slated to target $15 billion.
Amazon focuses on a record earnings quarter and it has provided a forecast for this period that was stronger than analysts' estimates.Cash, cash equivalents and marketable securities stood at USD $73 billion at the end of March, near an all-time high.
'Seasonously, they can grow into this leverage, said Matt Brill on Bloomberg TV Monday, head of the North America investment grade at Invesco Ltd.If you can borrow for a relatively cheap amount and then you can get the operating leverage to go with it, it results in a lot of earnings.
A representative for Amazon did not immediately respond to requests for comment.
The size of Amazon.com's balance sheet may increase meaningfully as its average cost of debt capital hovers near zero.With abundant cash and growing free cash flow, borrowing could not be required.However, the ability to fund organic growth and potentially initiate a large shareholder-return program at historically low costs suggests additional debt over time.
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Amazon comes in a fairly rare book, but it is big on those rare occasions.In June 2020, it tapped into the bond market and 10 billion borrowed for corporate purposes last.Prior to that, it sold $16 billion in bonds in 2017 in order to finance its acquisition of Whole Foods Market Inc.
The proceeds of Monday's offering are available for general corporate purposes, which may also include acquisitions and working capital.The two-year bond will be allocated for clean or sustainable projects, which include sustainable transportation, renewable energy and renewable buildings according to a bond document.
Amazon upgraded Moody's Investors Service one notch to A 1, its five-highest investment rating with a stable outlook.While the long-term sale of the new debt increases leverage, proceeds are expected to be deployed over time for capital expenditures that fuel growth, which is a temporary positive for the credit, said Moody's analyst Charles O'Shea.
Amazon has been on a spending spree since the pandemic began, building cloud-based warehouses and new data centers across the world in order to meet surging demand from online shoppers and businesses turning to remote work.The purchases of property and equipment totaled $45 billion in the 12 months ended in March, up from $20 billion during the previous period.
The board of directors of the company authorized $5 billion in equity buybacks in 2016, but it has never made purchases under that authority.
Citigroup's Morgan Stanley and Wells Fargo Co. were the agents of the sale.
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