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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: Jan Crawley who wrote (38019)	2/4/1999 9:05:00 AM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

Amazon's junk is in demand By Stephanie Gates Red Herring Online February 3, 1999 Fueled by e-commerce mania, normally staid institutional investors vied frantically to get in on Amazon.com's (AMZN) recent junk bond offering, despite unattractive terms and a poor credit rating. In response to this demand, Amazon increased its offering size from an initial $500 million to a monstrous $1.25 billion. Amazon's junk is in demand Critical Path seeks early IPO Onsale pitches AtCost Keith Benjamin, a managing director with BancBoston Robertson Stephens, attributes the frenzied investor response to the lack of Internet deals in the convertible bond market. "My sense is that there isn't a lot of supply at the moment." He adds, "If you're a convertible investor, there aren't that many high-flying convertible growths." BOND LINGO What are these investors actually buying? Amazon's debt offering consists of 10-year bonds with a coupon, or interest rate, of 4.75 percent. The bonds are convertible to stock at $156.05 a share. This is more expensive and, therefore, priced at a premium to the current share price of $125.75 (as of market close on Wednesday, February 3). According to Moody's Investors Service, Amazon's bond offering has a credit rating of Caa3. This rating represents the company's projected capability to pay the interest and principal on the bonds. Since its rating is below BBB, Amazon's bonds are considered below investment grade; these types of bonds are also known as high-yield or "junk" bonds. A high-yield bond usually carries a high interest rate to compensate the investor for the risk involved. Generally, the weaker a company's financial condition, the more it must pay to borrow money. IGNORING RISK Reflecting the Internet frenzy and the current disregard for profitability, another Wall Street rule is being ignored. Amazon is raising this debt to finance the building of physical infrastructure, such as distribution centers. Although profitability is still elusive and more debt further weakens the company's tenuous balance sheet, the company is getting cheap money. Its bonds will not cost the company much in the way of interest, and its convertible price currently values Amazon shares well above the current trading price. Yet even with unattractive terms, institutional investors still demanded more bonds than the company supplied. The growth potential for a flagship Internet retailer appears to be the key reason for this disregard for risk. As Mr. Benjamin maintains, the potential for a "phenomenal future" for Amazon is more important to investors than a weak balance sheet.