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Amazon is peddling its latest bonds with an equity story

Globe and Mail Update Inc. has a tremendous story to sell.

It has disrupted the retail industry, profoundly changing the way U.S. consumers buy and how retailers sell and distribute their products. It has stretched its tentacles into a widening array of products, from its own electronics to groceries. And now it's selling up to $16-billion of debt to pay for its rapid proliferation, namely, its acquisition of Whole Foods Market Inc., including slices of debt that mature in 30 and 40 years.

The bonds are expected to price today, with discussion around yields putting the 10-year tranche at about 3.3 per cent and the 40-year bonds at about 4.5 per cent. Those levels may tighten further and are well below longer-term averages for debt that's rated near the lower end of the investment-grade spectrum by Moody's Investors Service.

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The demand for this debt is understandable. Amazon seems like a fortress of strength that's sapping energy from the wider retail industry. But it's a much better story for equity investors than debt buyers, who ostensibly are concerned with hard numbers, like continuing profits. From an operating perspective, Amazon continues to post notoriously puny profits, especially relative to Wall Street's hopes. Combine that with maneuvers to avoid paying taxes, and the company is turning to borrowed money to fund its Whole Foods acquisition. While Amazon has revolutionized the online ordering and distribution of a range of goods, it has struggled before to have a similar influence over the way people buy food.

In other words, this company's debt is rated near the lowest rung of investment grade by Moody's for a reason. It's somewhat risky, especially when considering a four-decade horizon that's pocked with unknown disrupters and technological advancements.

Of course, this is 2017, and as my colleague Liam Denning has pointed out, this has been a year of some strange episodes in stock and bond markets. He pinpointed the Tesla bond sale as particularly remarkable because of the company's rapid cash burn and investors' willingness to accept relatively paltry yields. Amazon has proved itself much more than Tesla, but it, too, is selling investors on hopes and dreams more than reality. Investors who buy 30-year and 40-year Amazon bonds are basically getting equity in the company without the upside should the company continue its path toward world consumer dominance.

While it's understandable that bond investors are eager to get into the joy of technology investing in 2017, they shouldn't be surprised if their investments lose their sheen in the years to come. They're taking risks without the benefit of a potential windfall. All they can hope for is to get their money back with some additional chump change for their efforts.


Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

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