AMAZON.COM INC has blown the primary market for new debt wide open just days after market volatility, sparked by soaring-then-plummeting oil prices, all but halted issuance.
Its mega offering is priced cheaply, for a reason: Too much of a good thing is still too much.
At a total size of US$37bil spread across 11 tranches, the dollar portion ranks as the fourth-largest fundraising ever.
But with an additional €10bil (US$11.6bil) planned in eight euro-denominated bonds, it could top US$50bil combined and break the record set by Verizon Communications Inc in 2013 when it raised US$49bil.
It’s the online retail and web services behemoth’s turn to demonstrate the scale of its data centre and artificial intelligence (AI) plans, a month after Alphabet Inc embarked on a similar drive-by debt raid raising US$32bil.
While the capital markets may seem to have capacity to absorb such monster deals, appetite will soon reach a natural limit as investors worry about being overexposed to a single sector if AI fails to deliver on its revenue promises.
With a market capitalisation of US$2.3 trillion and expected revenue this year of US$800bil, Amazon’s US$125bil of outstanding debt is still relatively tiny.
This week’s offering shows it can borrow at will in any maturity or currency of its choosing.
It issued US$15bil of debt as recently as November – but the funding needs of AI are proving insatiable.
Raising a quarter of Amazon’s planned US$200bil of annual infrastructure expenditure in highly volatile markets is quite something.
The dollar bonds are spread across maturities ranging from two years to a rare ultra-long 50-year deal; the euro securities range from two to 38 years.
And Amazon is paying a premium to the average for investment grade corporates.
The new deals offer about a 20 basis point pick up to the AA corporate average.
Demand for the new dollar debt was a near-record total of US$126bil, or 3.4 times the amount on offer.
Even though the spreads on offer tightened in from the initial price talk, as is usual, the average premium to existing Amazon debt was about 10 basis points.
Amazon’s new deals are coming cheap to existing debt. The 10-year Amazon deal issued in November came at a tighter spread than the latest deal issued Tuesday.
In an otherwise turbulent market, large-scale bond deals like Amazon’s are great fee earners for the investment banks arranging them, as well as for investors piling in at attractive yields.
For the issuers, it’s all about gaining scale under the premise that the financing costs prove to be negligible compared with the returns potentially on offer.
The eye-watering amounts the big AI players need to spend means they’re likely to remain frequent visitors to the debt market, but at some point fund managers will grow wary of too much single-sector exposure, no matter how cheap the debt is.
A similar phenomenon happened a decade ago, when oil-rich and largely debt-free Gulf countries led by Saudi Arabia embarked on a bond-market splurge.
It was great for investors for a while, offering diversification and juicier yields compared with their typical holdings from debt-burdened developed market sovereign borrowers and companies.
Eventually, demand tailed off as investors grew wary of overloading on a sector still designated as an emerging market and Gulf issuers proved unwilling to keep paying more to borrow than their ratings would suggest.
This pattern could well repeat for the AI behemoths. — Bloomberg
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. The views expressed here are the writer’s own.
