Amazon’s jumbo debt sale is both unnecessary and irresistible.
The ecommerce group has raised $18.5bn of debt via an eight-part bond sale, with maturities ranging from two to 40 years. Fears of higher inflation that triggered a sell-off in technology stocks on Tuesday were not shared by the investors who crowded into Amazon’s bond offering the night before. The sale drew almost $50bn in orders and helped push the spreads on two- and 20-year tranches to a record low.
For highly rated companies such as Amazon, which is already sitting on $33.8bn in cash and cash equivalents, it makes sense to borrow at these rates. Debt is still cheap. Although the average yield across US investment-grade bonds is 2.15 per cent, up from the record low of 1.78 per cent at the start of the year, according to an index compiled by ICE Data Services, it remains low by historical standards.
President Joe Biden’s plan to raise corporate tax rates may also be prompting companies to rethink their approach to debt. One consequence of higher corporate tax is that it lowers the relative after-tax cost of a company’s borrowings.
If inflation is to erode the value of companies’ future cash flows, then now may be the time to spend on hard assets. Amazon spent $40bn in the 12 months to the end of March on property and equipment. That is more than twice the amount spent in the prior year. Some of the proceeds from its latest bond sale will be used to fund projects in renewable energy and clean transport.
For bond investors, Amazon is a high-quality, relatively rare borrower. Over the past 25 years, the share of low, BBB-rated borrowers in the investment-grade bond universe has more than doubled to 52 per cent, according to Bank of America data.
Stockpiling cheap cash does have its drawbacks. Chief executives may be more inclined to spend on frivolous deals. But with a market value over $1.6tn, Amazon has more room for error than most.
Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up