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To: cool who wrote (49)	8/22/1998 11:18:00 AM
From: agent99	Respond to of 2802

ARE AMAZON'S BONDS REALLY JUNK? By Peter D. Henig Red Herring Online August 21, 1998 If Amazon's stock is so high, why are its bonds such junk? That's the harsh question posed by Standard and Poor's, which recently assigned a "B" rating to Amazon.com's recent bond issue. The online bookseller has issued $530 million in 10 percent senior discount notes due in 2008. S&P released its rating on Thursday, stating that the rating "reflects the company's negative operating cash flow and rapid growth in an evolving marketplace, which necessitates high levels of investment in technology, logistics and marketing, and the potential for heightened competition." Dollars and cents Although S&P conceded that these risks are modestly offset by Amazon's current position as the leading online retailer of books, as well as its ventures into selling other products, the issue still comes down to cold, hard cash. Amazon is spending aggressively on marketing, advertising, and product development. Standard & Poor's expects that this strategy will keep the company from realizing positive cash flow at least through 1998. And while the company now has enough cash on hand to fund its growth and further expansion of its brand -- it had $340 million on hand in June 1998, and the debt will not initially require interest payment in cash -- it is still a toss-up if the numbers behind its e-commerce business model really work. A recent report by IceGroup, an e-commerce consulting firm, concludes that Amazon.com must generate $1 billion in annual sales simply to break even, given current spending patterns by users and current costs incurred by the company. Suddenly, S&P is not alone in challenging the conventional wisdom on Amazon.com. Neither a borrower nor a lender be "In terms of a credit risk, you have to look at factors like cash flow, and right now the cash flow is negative," admits Ryan Jacob, portfolio manager for the Internet Fund. (Mr. Jacob's fund hold shares in Amazon.) But Mr. Jacob also argues that demand for the newly issued Amazon bonds, despite the "junk" status of their S&P rating, has been high. "The rating is indicative of their cash position today, not of their future potential," says Mr. Jacob. That may be. Yet IceGroup's study may indicate that the market is ready to take a sobriety test when evaluating the relative health and future of Internet e-commerce companies. "Never has the gulf been so wide between the equity lender and the equity buyer," says David Simons, managing director of Digital Video Investments. "S&P is expressing the perspective of lenders, whose criteria are always far more stringent than for buyers," says Mr. Simon. "But they're still paying 10 percent interest, in a 5 percent environment." Mr. Jacob counters that an equity offering wouldn't have been wise. "Amazon could have done a secondary offering, but they felt their stock was too valuable and didn't want the dilution; that's why they're issuing bonds." S&P allowed that a possible ratings upgrade will depend upon the company's ability to execute its strategies and achieve enough scale to leverage fixed costs and marketing expenses. Will demand for Amazon's bonds weaken? We'll have to see if the garbage in, garbage out rule of programming applies to tech finance, too.