Re your comment that amzn is now out of it......
IN THE LAST two months, the investment sector that
made Mike Milken famous - and eventually infamous -
back in the 1980s has been flattened in one of the more
brutal short-term routs of "high yield debt" in the 1990s.
Indeed, financier George Soros said Tuesday that the
"junk-bond market has already shut down" as a global
credit crunch restricts the flow of funds and affects "the
availability of credit in the domestic economy."
Since the beginning of May, corporate bonds tracked
by Lehman Bros. Inc., the Wall Street investment firm, have
climbed an average of 3.41 percent in value. But during that
same period, so-called junk bonds (those with less than
investment grade ratings) tracked by Lehman have fallen by
more than 4.31 percent through Aug. 31st. What's more,
further and steeper declines are likely to have been
registered in Lehman's normally slow-moving Index in the
two weeks since then.
In this universe of
shaky businesses,
Amazon.com has a
special problem.
That in turn is bad news for investors - institutions and
individuals alike - who've placed bets on the surprising
number of junk offerings that came pouring onto the market
from Internet start-up companies as the market approached
its top earlier this year. Among the offerings: junk debt from
PSINet Inc., Level Three Communications Inc. and Verio,
Inc. All are involved in developing Internet-related
communications systems.
AMAZON.COM JUNK HARD HIT
Some of the biggest losers of all: the more than a dozen
mutual funds that invested in a huge, $530 million junk bond
offering of Amazon.com, the online bookseller, back in
May. Since then, Amazon's stock has soared by 55 percent
in value - and that's including the stock's recent slide from
more than $128 back to barely $72. By contrast, holders of
the Amazon junk bonds have watched their value shrink by
13.5 percent - this during a time when U.S. Treasuries
have risen by more than 7.5 percent.
The rout in junk bonds highlights the high risks inherent
in low-grade debt securities, which generally tend to
perform well - in the aggregate - only during periods of
low inflation and improving economics. When the economic
landscape clouds over, so do the prospects for junk debt.
That's because companies with junk debt in the market
tend to have less attractive balance sheet assets, less stable
financials, and a more limited ability to generate cash than
do investment grade corporations - which is why the
issuers have to offer high interest rates to sell them in the
first place.
In this universe of shaky businesses, Amazon.com has
a special problem. Though its balance sheet showed
shareholder equity (the excess of assets over liabilities) of
$39.4 million as of June 30th, the company's tangible net
worth - which is all that fixed income investors really care
about (shareholder equity minus goodwill and purchased
intangibles) - is actually a negative $13 million.
The rout in junk
bonds highlights the
high risks inherent
in low-grade debt
securities.
Worse still, with the announcement back in August that
Amazon.com will spend $280 million in stock to acquire
Junglee Corp. and Sage Enterprises, Inc., the intangibles
portion of Amazon's balance sheet will become larger than
ever. And that in turn promises further erosion in the price
of the Amazon bonds, no matter what happens to the
company as a whole.
This lack of tangible collateral behind the junk debt
helps explain why Amazon had to offer an eye-popping
10.4 percent yield-to-maturity to entice investors to the
offering in the first place.
In the deal, Amazon's underwriter, Morgan Stanley
Dean Witter & Co., sold $530 million worth of 10-year
notes at a startling 38.5 percent discount from their face
value - meaning that Amazon received (net of fees to the
underwriter), less than $320 million from the offering. Of
course, come May of 2008, when the notes mature,
Amazon will have to pay back all $530 million, which
includes the $210 million it never received in the first place.
Amazon.com, Inc.
(AMZN)
price
change
$73.00
unch
Data: Microsoft Investor and S&P
Comstock 20 min.delay
Why pay back more than it received? Because that
was the only way the notes could be sold at all. Since
Amazon.com couldn't afford the cash drain of interest
payments on the notes, Morgan Stanley structured the deal
to be free of payment (the interest would simply "accrue")
for the first five years, with the notes paying 10 percent
annually thereafter until maturity. With the steep payment at
maturity, Amazon.com has simply pushed off the day of
reckoning in the hopes that its business prospects will
brighten enough by then to pay off, or refinance, the deal.
More than a dozen mutual funds - including ones run
by Oppenheimer and IDS - went for this pitch, and as of
the latest published data available from Morningstar Inc.,
the mutual fund research group, they are now sitting with
13.5 percent-plus losses on the bet.
If Amazon.com can hang on until the bonds are callable
(at a premium) in 2003 - and then decide in fact to call
them in (that is, redeem them) - the current holders should
make out OK. If not, well, what can one say?
Risks like that face nearly all junk bond investors during
uncertain economic times. There are almost no sites on the
World Wide Web that offer adequate research - including
timely market quotes - about corporate bonds, be they
investment grade or just junk. But the best of what's
available can be found at a premium site at the address
www.interquote.com.
Visit the site, pay your sign-up fee (the service costs
from $29.95 to $69.95 a month, depending on depth of
data required), then hunt around for as many of the
following as you can find: bonds from ValueJet, Family
Restaurants, Pathmark Stores, Musicland Group, Levitz
Furniture, Trump Castle Funding, Wicks Lumber, Motels
America, Trans World Airlines, Planet Hollywood,
Dictaphone Corp., Omnipoint, Speedy Muffler King, Telex,
J. Crew and Bally's Total Fitness, to name but a few.
In some cases, the issuers on that list are deeply
troubled companies. In other cases they're companies that
have been in bankruptcy at least once already. Nonetheless,
investors bought their bonds betting that they'd come out all
right in the end. As of today, it looks to have been a
sucker's bet.
from msnbc...... also on the amzn SI thread...
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