Internet Firms' Debt Outlook Is Unclear After Amazon Sale
By PALLAVI GOGOI and GREGORY ZUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL
2/1/99
NEW YORK -- It already was a hot stock. Now Amazon.com Inc. also is a hot bond,
offering fixed-income investors a taste of the volatility typical of Internet stocks.
On Thursday of last week, the Internet retailer of books, music and videos sold $1.25 billion
of subordinated notes convertible into the company's common shares, a private issuance that
ranks among the largest convertible deals on record.
Brought to market by Morgan Stanley Dean Witter & Co., the offering was more than
doubled from its planned size after underwriters discovered that many investors are just as
enthusiastic about securities convertible into an Internet company's stock as they are about
those stocks.
The Amazon.com notes, due 2009, were priced at par with a 4.75% yield and are convertible
into common shares at $156.05, representing a conversion premium of 27% over Thursday's
closing share price. In other words, investors are willing to accept a slim 4.75% yield for the
option of buying Amazon.com shares at $156.05.
After trading as high as 105 in the early frenzy surrounding the offering, the price of the notes
by late Friday had slipped to 98.75, traders said. "The convertible universe has never seen
this kind of volatility," said Jeffrey Cohen, portfolio manager at Silverado Capital
Management, a hedge fund that trades convertible securities.
That probably wasn't surprising, given the volatility in Amazon.com shares, some traders
noted. On the Nasdaq Stock Market Friday, Amazon.com shares closed at $116.9375, down
$5.9375, or 4.8%, from Thursday's close of $122.875.
As a convertible security, the Amazon.com issue can be converted into shares at the
investor's choosing. The threat that such conversions will dilute existing shareholdings of
Amazon.com was cited by analysts as a reason for the share-price decline late last week.
In contrast to most other issues, which usually can't be called in less than three years, the
Amazon.com notes can be called if its share price rises more than 50% over the strike price of
$156.05. Considering the volatility of Amazon.com's stock, the securities could be called
fairly quickly, people in the market noted. That may make them less attractive to some
long-term investors.
However, the Amazon.com deal includes a so-called "make-whole payment" to compensate
investors for the risk of an early call. The payment is based on a complex formula and would
vary, depending on when the call was exercised.
One person familiar with the issue said that this arrangement was key to attracting buyers.
"The structure allows high-growth companies to access equity at attractive terms," he said.
It isn't clear yet whether other Internet companies will follow Amazon.com with similar
offerings, analysts said, although Amazon.com's experience likely will grab a lot of attention.
Still, "whether the market would accept that from anybody [else] is hard to say," said Anne
Cox, director of convertible research at Merrill Lynch & Co.
Amazon.com's convertible deal may be most appealing to professional investors who
actively trade convertible securities, including certain types of hedge funds.
The company's common stock has a 30-day historical volatility measurement of 146,
compared with a volatility measurement of 18 for the Standard & Poor's-500 stock index,
noted Christopher Towle, portfolio manager at Lord, Abbett & Co., who buys convertible
bonds.
Last week wasn't the first time Amazon.com has visited the debt markets. Last May, it
stirred up similar hoopla in the high-yield market when it sold $325 million of junk bonds.
The offering of zero-coupon securities was three times oversubscribed by investors.
Friday, Moody's Investors Service Inc. sounded a note of caution when it assigned a
speculative rating of Caa3 to the $1.25 billion convertible issue, while upgrading
Amazon.com's existing senior discount notes due 2008 to Caa1 from Caa2.
Moody's cited its "expectation that Amazon.com is unlikely to generate positive cash flow
for at least another two years, and is expected to invest heavily in fixed assets, intangibles,
and working capital in the near term," among other things. The ratings agency also noted "the
uncertainty of the company's future growth and operating strategies."
Amazon.com declined to comment, citing Securities and Exchange Commission Rule 144a,
governing its convertible offering.
Meanwhile, although Amazon.com's stock has soared in the past eight months -- lifting its
market capitalization to around $17 billion from $2 billion at the time of the May debt
offering -- its bonds have failed to track the rise in its share price. Its zero-coupon bonds,
which were sold at 61.507, were quoted last week at 62.
But that didn't deter buyers for the latest offering. "The Internet craze is contagious, and
everybody wants to be in on this," said Mr. Towle of Lord Abbett. |
