Why Is Amazon, With a Well-Stocked Treasury, Issuing 11 Trillion Won in Corporate Bonds?

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Yujin Cho] Amazon, the world's largest e-commerce company, is issuing corporate bonds worth $8.25 billion (approximately 11 trillion KRW). Amazon has issued corporate bonds three times in the past year and a half amid the COVID-19 boom.

According to Bloomberg on the 29th (local time), Amazon will issue senior unsecured bonds worth 11 trillion KRW. The corporate bonds come in five types with maturities ranging from 2 years to 10 years, and the 10-year bonds have an interest rate about 0.95 percentage points higher than government bonds. The funds raised from this bond issuance will be used for repaying existing debt and share buybacks.

Amazon has issued corporate bonds three times since last year. In May last year, during the height of the COVID-19 pandemic, it successfully issued corporate bonds worth a record $18 billion, followed by another issuance of $12.75 billion in April this year.

Including the newly issued bonds, Amazon's total debt amounts to $70 billion, of which long-term debt was $58.9 billion as of September. Its cash and cash equivalents reach $58.7 billion. The proportion of long-term debt among total borrowings is high at 84%, and its cash assets are solid, indicating a strong liquidity position.

Bloomberg evaluated that, with growing expectations that the peak of interest rate hikes is near due to inflation peaking out, Amazon acted quickly to secure funds before investment sentiment toward high-grade corporate bonds weakens. In fact, the average interest rate on investment-grade corporate bonds peaked at the 6% range last month and has fallen to the mid-5% range this month.

Robert Schiffman, a Bloomberg Intelligence analyst, said, "The funds raised from this bond issuance will provide firepower for potential additional mergers and acquisitions (M&A) and further share buybacks."

Amazon expanded its business during the pandemic with soaring performance, but as government policies shift toward tightening and recession concerns persist, it faced cost pressures. Accordingly, it has launched the largest restructuring in its history, cutting 10,000 employees, about 3% of its headquarters staff (1% including global workforce).

Although infrastructure spending is expected to decrease by about $10 billion this year compared to last year due to cost efficiency measures, some analyses suggest that such cost reductions may not translate into improved profitability.

This is because the majority of Amazon's 1.5 million employees are warehouse and logistics workers, making layoffs difficult, and recent wage increases, rising labor costs, and union strike movements are acting as negative factors.

Amazon posted a net loss of $3.8 billion (approximately 4.8 trillion KRW) in the first quarter of this year, marking its first quarterly loss in seven years, and shows no signs of recovery. The fourth-quarter sales forecast is expected to be between $140 billion and $148 billion, significantly below the market estimate of $155.15 billion.

Meanwhile, the corporate bond market is closely watching the upcoming employment report and remarks by Jerome Powell, Chair of the U.S. Federal Reserve (Fed), ahead of this year's final Federal Open Market Committee (FOMC) meeting. Key inflation data is also scheduled to be released on the 31st.