Monday, December 1, 2014

Moody’s Cuts Amazon Outlook to Negative

Moody's Investors Service today changed the outlook for, Inc. ("Amazon") to negative from stable, and affirmed the Baa1 senior unsecured rating.

"The change in outlook to negative results from Amazon's announcement this morning that it was issuing a sizeable, though amount to be determined, level of new senior unsecured notes," stated Moody's Vice President Charlie O'Shea. "Proceeds are to be used for general corporate purposes in support of Amazon's myriad growth initiatives, and it is Moody's expectation that the funds will not be utilized for any form of shareholder returns. While the new debt will further exacerbate Amazon's already weak interest coverage due to, among other things, the lack of visibility surrounding the cadence for deployment of proceeds, potential areas of future growth and investment utilizing these proceeds, and the timing of potential positive returns, Moody's believes that the company's excellent liquidity provides sufficient cushion to affirm the Baa1 rating."

Moody's went on:
Amazon's Baa1 senior unsecured rating reflects its excellent liquidity and conservative financial policy relative to shareholder returns, which overcome a presently weak overall quantitative credit profile resulting from prodigious growth-oriented spending. The rating also recognizes Amazon's dominant position as an online retailer, though Moody's believes it is facing increased competition from brick-and-mortar retailers as they morph their successful businesses online, as well as its leading position in cloud-based storage and other services via Amazon Web Services. The rating also reflects Moody's expectation that this present investment cycle will begin to generate positive returns as measured by improved interest coverage during 2015, as well as the expectation that Amazon will continue to maintain high cash balances during the present investment cycle until positive returns from these significant investments begin to generate. The negative outlook reflects the impact the new debt will have on interest coverage that is already weak at 1.2 times for the LTM September 2014, as well as debt/EBITDA, which will increase meaningfully as well. Given present weak interest coverage due to expense levels that are likely inflated as a result of significant investments in both technology and SG&A, any potential upward rating movement in the near-to-medium term is unlikely. Over time, ratings could be upgraded if Amazon's interest coverage was maintained around 5 times and RCF/net debt was sustained above 35%. Ratings could be downgraded if RCF/net debt fell below 20% with interest coverage maintained below 3 times, or if liquidity were to weaken.
Given how low interest rates are, it is actually a shrewd move for Amazon to raise debt at these rates. All the smart money is doing this. Warren Buffett included. As interest rates climb (and price inflation picks up) borrowing at current rates is going to look like a very shrewd move.

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