UPDATE 3-Amazon hits the prime time with jumbo M&A deal
Concerns that supply fatigue would hurt Amazon’s bond trade were quickly put to rest on Tuesday after the internet retailer scored single digits concessions on the back of a US$46.8bn book.
The US$16bn seven-parter was the asset class’s fourth biggest deal so far this year - according to IFR data - putting it just behind British American Tobacco’s US$17.25bn printed a week ago.
It is also smaller than the US$22.5bn issue from AT&T in July and a US$17bn trade from software giant Microsoft in January.
The borrower was able to squeeze pricing a good 15bp-25bp from start to finish across the curve as books quickly grew.
In the end, it priced a US$1bn three-year at 40bp over Treasuries, a US$1bn 5.5-year at T+60bp, a US$2bn seven-year at T+75bp, a US$3.5bn 10-year at T+90bp, a US$2.75bn 20-year at T+105bp, a US$3.5bn 30-year at T+125bp and a US$2.25bn 40-year at T+145bp.
Interest was largest around the 10-year bond, which saw books hit US$9.8bn, followed by the seven-year which got US$8.5bn in orders.
The huge demand for the bonds despite complaints of indigestion during last week’s US$43.325bn high-grade deluge, did not surprise investors.
“If you’re going to be the third mega-deal to come within a month, this is the name you want to be,” Matt Brill, senior portfolio manager at Invesco, told IFR.
“It’s a name that has a lot of glamour around it, and it hasn’t issued for almost three years,” he said.
Amazon was last in the bond market in December 2014, when it raised US$6bn through a five-part bond sale that saw order books peak at US$14.9bn.
“We are comfortable buying Amazon’s bonds across the entire curve given its strong operating trends and competitive position in both its e-commerce and cloud computing businesses,” CreditSights analysts wrote in a report Tuesday.
The 40-year tranche was considered unusual for a tech company - but not unheard of. Microsoft has brought four deals with 40-year slices to market over the past three years, according to IFR data. And Oracle issued a US$1.25bn 40-year bond in April 2015.
Amazon’s longer tenors had pension funds lining up for the deal, a source said. The 40-year bonds had a US$5.7bn order book.
Proceeds are slated to help finance Amazon’s US$13.7bn acquisition of Whole Foods.
Prior to the deal’s announcement, bond buyers had been curious to see how the market would handle Amazon’s credit standing given the gulf between S&P and Moody’s ratings - which are four notches apart.
The difference in opinion between the company’s AA minus credit rating from S&P and its Baa1 from Moody’s reflects Amazon’s ambiguous position between the retail and tech sectors - as well as its somewhat slender profits, market watchers said.
“You could attribute the ratings differential to the low margins of the business - versus the huge equity cushion, economic moat, and dominant market shares in its e-commerce and cloud computing businesses,” Jordan Chalfin, senior analyst at CreditSights, said.
In any event, both rating agencies seem comfortable with the leverage impact the Whole Foods acquisition will have on Amazon: S&P removed its negative watch on its AA- rating on Friday, while Moody’s has a positive outlook with its Baa1 rating.
Investors were offered some protection in this transaction by a special mandatory redemption at 101 if the merger does not occur prior to February 15, 2018 - but only on the three-year, 5.5 year, seven-year and 10-year tranches. The SMR is subject to a one-time extension of 90 days under certain circumstances.
There’s a high likelihood of the Whole Foods deal closing, as the combined company will have only around 3% market share of the US$600bn US grocery market, according to a CreditSights report dated July 27. The transaction is expected to close this calendar year.
Bank of America Merrill Lynch, Goldman Sachs and JPMorgan are running the deal.