Amazon (Nasdaq: AMZN) today disclosed $13.7 billion of bridge commitments for its proposed acquisition of Whole Foods Market (Nasdaq: WFM), outlining plans to issue senior unsecured notes, term loans, bridge loans, or a mix to finance the transaction, according to regulatory filings.
Whole Foods bonds gapped tighter on the news, but the development also sent a shudder through the credit markets for traditional grocery rivals and big-box grocery aspirants.
Earlier today, the Seattle-based internet retailing giant said it would pay $42 per share for Whole Foods in a cash transaction valued at roughly $13.7 billion. The deal is expected to close in the second half of this year. Whole Foods will be obligated to pay a fee of $400 million if the acquisition is terminated, regulatory filings show.
Amazon yesterday entered into a commitment letter with Goldman Sachs and BAML for a 364-day senior unsecured bridge term loan facility in an aggregate principal amount of up to $13.7 billion to fund the acquisition.
Neither Amazon nor Whole Foods are frequent issuers on the bond market. Amazon’s last bond placement was completed in December 2014, when it printed a $6 billion, five-part offering.
Whole Foods last tapped the market in November 2015, when it placed $1 billion of 5.2% 10-year notes due December 2025 at T+300, or 5.22%. Of note, the 2025 issue changed hands at T+198 ahead of this morning’s news, but gapped down to trades as tight as T+75 on the announcement, according to MarketAxess.
For reference, Amazon’s higher-rated 3.8% notes due Dec. 5, 2024 traded yesterday at T+43, or a G-spread of 62 bps, while its 4.95% bonds due Dec. 5, 2044 traded a modest five basis points wider this morning at T+106, or a G-spread of 115 bps, trade data show.
Proceeds from Whole Foods’ December 2025 deal were used to back a $1 billion share-repurchase program, which at the time triggered a change in outlook to negative, from stable, by S&P Global Ratings for its BBB– rating. The outlook was still negative as of the Amazon play, with S&P Global Ratings in February noting credit-protection strains amid competition in the natural and organic food space from traditional grocers and less conservative financial policies.
Moody’s maintained a stable outlook on its Baa3 rating for Whole Foods ahead of the M&A development.
The agencies at present maintain stable outlook on their respective—and disparate—AA–/Baa1 ratings profile for Amazon.
“We expect Amazon will continue to review potential acquisitions (usually funded by cash) and make substantial investments in new businesses around e-commerce, cloud computing, and entertainment consistent with its overall strategy of expanding the scale and scope of its operations (both horizontally and vertically) and will continue to benefit the company over the next few years,” S&P Global Ratings stated in ratings rationale published in February.
Of note, in February 2016, Moody’s revised its outlook on its Baa1 rating to stable, from negative, to reflect “its excellent liquidity and conservative financial policy relative to shareholder returns, and improving operating margins and strengthened quantitative profile despite prodigious growth-oriented spending and over $5 billion in ‘absorbed’ shipping costs.”
Notably, bonds backing traditional grocer Kroger continued sharply wider this morning, after its credit spreads lurched higher yesterday on its announcement of a material reduction in 2017 earnings guidance amid brutal margin pressures. The company acknowledged mounting competition from both new-store entrants, increasingly robust grocery offerings from Walmart, and the developing threat of digital competition from cash-awash online presences, and was pressed by analysts ahead of today’s news on the risks of competing with the much larger-scale and ambitious Amazon.
Kroger 4.45% bonds due Feb. 1, 2047 traded as wide as T+185 on the news this morning, or 20 bps wider on Amazon news and 30 bps wider since yesterday’s profit warning. (The notes dated to issuance in January at T+160.) Kroger five-year CDS continued 17 bps wider, or 20%, to a four-year high near 100 bps, from 71 bps before it slashed its guidance.
Meantime, the cost of five-year debt protection on the bonds backing Target and Wal-Mart Stores increased 12–14% today, and TGT 3.625% 2046 bonds changed hands 10 bps wider, at T+125, trade data show.
Supervalu’s recently inked $840 million B term loan (L+350, 1% floor) was bracketing 99 this morning, down about a point from the last session, sources said. The loan freed to trade at the start of the month at 100/100.75. The issuer said it planned to use the proceeds in part to support its acquisition of Unified Grocers, in a bid to create one of the nation’s largest grocery wholesale companies. — Staff reports
This story is taken from analysis which first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.