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Moody's Cool on Amazon.com's Bond Issue
-- 5/18/98
The $300-million bond issue made by Amazon.com earlier this month that will net the company $275 million in proceeds drew a Caa2 rating from Moody's Investors Service. The grade means that Moody's considers the issue to be "highly speculative."
According to Moody's, the rating reflects the uncertainties about Amazon's ability to achieve profitability in the near to medium term, and concerns about its "very low gross margins." In addition, the rating recognizes a high level of fixed expenses due to the company's early stage of development, increasing competition both on and off the Internet from well-capitalized retailers, and the uncertainty of the return from future investments in capital, new products or acquisitions.

Moody's noted that after the bond issue, Amazon will have extremely high financial leverage, which will require significant growth in revenues and profitability to eventually service the debt. Its ability to achieve those goals will be tied to a number of uncertainties, including the growth of Internet commerce, competition from online and traditional retailers, tax and other government regulations, and the company's ability to improve its operations.

Moody's did recognize that Amazon.com has a number of attributes that may contribute to its eventual success. Among these are strong name recognition, its exclusive rights to attractive "real estate" on popular websites, and the widespread coverage it receives in financial, trade and consumer circles. Moody's also noted that in addition to its explosive growth in sales, the company has the potential to generate revenues from advertising.
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