Opinions
The amazon bond offering
Amazon borrowed $10b in cash from investors, and in return Amazon gave the investors an IOU.
Amazon Just raised $10 billion by issuing corporate bonds for “general corporate purpose” so let us talk about bonds.
Amazon can get money in many ways:
1. From savings
2. From the bank
3. From investors
When Amazon wants to borrow from investors it has two options:
a. Equity by Sell shares; investors become part owners of Amazon, no guarantees on return
b. Debt by borrowing cash: investors get guarantee on return, but no ownership
When Amazon wants to borrow cash, without going to a bank it issues a bond. Why not borrow cash? Well because if interest rates become exceptionally low like in the US today, it is cheaper for any organization to simply issue bonds. Amazon was able to borrow $1 billion bond and promise to repay investors just 0.4% in interest every year. The Financial Times reported that this was the lowest interest rate for any bond in US corporate history.
Amazon thus borrowed $10 billion in cash from investors, and in return, Amazon gave the investors an IOU. Then IOU is called a Bond. Amazon also promised to pay interest on the IOUs. The bonds issued earn a fixed Interest payment called coupons. The coupon rates will never change. The coupons rates payable will also increase as the duration of the IOU gets longer. For instance, Amazon will pay 0.8% to borrow for five years but will pay 2.7% to borrow for 40 years.
Bonds are usually sold at a par price, of 100. This means each unit of the bond is valued at inception at N100. However, if Amazon believes that demand for her bonds will be high, she can sell the bonds at a premium thus, the N100 par bond will be offered for sale at N103 i.e. a N3 premium.
The reverse holds, Amazon could offer a discount to investors by selling a N100 par bond at N97, a N3 discount to par. Bonds can also have a call or put option. A call option means Amazon can recall her bonds early before maturity and repay the principal to the investors.
The return on bond is the yield paid divided by the price the bond was bought. Thus, if coupon is $2 and bond was sold for 100, yield is 2%
Investors buy bonds because:
Predictable, Constant returns, Bonds offer a potentially predictable return. Coupon do not increase or decrease over the life of the bond. So, when the economic times are uncertain, bonds do well because the returns via the coupons are constant and known. However important to note that as inflation rises, bonds do badly because those fixed payments lose value.
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Safety of Principal: When a company issues debt via bonds it usually places certain collateral toward repayment of the bond or simply issue the bond based on the faith of the company to repay. If the company however fails and is under bankruptcy proceeding, the bondholders are placed above the equity holder to receive back their investment from the business. Thus, the investors who invested in the $10b Amazon bond offer are higher in claims ladder than equity holders. Moody Research report showed rated investment-grade municipal bonds in the US had an average cumulative default rate of just 0.10% between 1970 and 2016.
Thus, many portfolios use bonds to hedge against a fall in stock market process. Stocks and Bonds tend to be negatively correlated, i.e. as stock fall, bonds do better, especially if the fall in equities is caused by economic
Tax Advantages
Certain bonds issued by Sovereigns have tax-exempt status, meaning the coupon returns are not accessed for taxes. FGN, State and Local Government bonds are usually tax-exempt. Corporate bonds do not enjoy this tax privilege, but Amazon can deduct interest expenses it pays to investors from her tax liability, i.e. interest expenses are tax-deductible.
Using the pictorial above let us review the Amazon bond
1. The Maturity date of 2040 tells us this is a 40-year bond.
2. The Coupon means every year Amazon will pay 2.7% as interest to bondholders
3. The Bond is callable
4. The Bond is sold at a $3.250 premium
5. Since bond is callable, Yield to call is also calculated.
Blurb
Ecobank: Pan African challenges weigh in on results
The group, through its Nigerian subsidiary, continued to take a hit resulting from its 2011 acquisition of Oceanic Bank.
ETI recently published its audited consolidated financial statements for the year ended 31 December, 2020.
Year-on-Year, revenues were up 4 percent to USD1,679.8 million while operating profits before impairment losses were also up 14 percent to USD625.7 million. Net interest income also increased by 21 percent on the back of a 27 percent decrease in interest expense, while customer deposits increased by 13 percent to USD18.3 billion.
However, apart from these, not so much else was great about the results. For example, profit before tax and goodwill impairment was down 17 percent to USD337.88 million, while profit for the year was down 68 percent year-on-year to USD88.32 million.
ETI faced several headwinds during the year that ultimately contributed to the performance. The group, through its Nigerian subsidiary, continued to take a hit resulting from its 2011 acquisition of Oceanic Bank. The effect on the profit after tax in 2020 was a USD163.56 million impairment charge in FY 2020.
In addition, a USD61million monetary loss was charged to the group’s profit resulting from the hyperinflationary economies of Zimbabwe and South Sudan where it operates. According to the Zimbabwe National Statistics Agency, Zimbabwe’s annual inflation eased to 348.59 percent in December 2020, compared with 401.66 percent in the previous month. To put this in perspective, South Sudan’s inflation rate on the other hand was estimated at approximately 58 percent at the end of 2020.
Perhaps further exacerbating the not-so-good results, the group effectively incurred a significant tax rate of 52.25 percent in 2020 compared to 33.3 percent for the same period by December 2019. A combination of these events caused a year-on-year decline in profit after tax by 57 percent, to USD174.32 million at the end of 2020 (2019: USD405.8 million).
The tough operating environment brought about by the global pandemic also impacted the results. While loan and advances and impairment charges were relatively flat in 2020, a significant portion of its loan book received regulatory forbearance, which meant that customer repayments of loan principals were deferred by up to 12 months.
Also, the group’s NPL ratio remained higher than the regulatory NPL limit while Ecobank Nigeria’s NPL was higher than the Group’s NPL ratio. The write-offs arising due to goodwill impairment in Ecobank Nigeria as well as hyperinflation in Ecobank operations in Zimbabwe and South Sudan affected the group’s regulatory capital ratios.
Although the group remained compliant with the minimum regulatory capital adequacy ratio requirements, its Tier 1 Capital Adequacy Ratio declined from 8.8 percent FY2019 to 8.5 percent FY2020 while Total Capital Adequacy Ratio also declined from 11.6 percent FY2019 to 11.5 percent FY2020. The minimum capital requirements were 7.25 percent Tier 1 and 9.5 percent, Total Capital, respectively.
In January 2021, Ecobank Nigeria raised N50 billion in subordinated debt from Development Bank of Nigeria with a 10-year tenor at 6.5 percent. It also in February 2021 raised USD 300 million in form of a 5-year, fixed-rate, US dollar-denominated bond. These amounts will improve the Nigerian subsidiary’s capital adequacy ratio.
ETI groups its African operations into four geographical regions. The reportable operating segments are Nigeria, Francophone West Africa (UEMOA), Anglophone West Africa (AWA), and Central, Eastern and Southern Africa (CESA). Unlike other Nigerian Deposit Money Banks with International presence that outperform their African and international subsidiaries, the reverse appears to be the case with Ecobank Nigeria within ETI. Among the four geographical regions, Ecobank Nigeria contributed the least to the operating income, operating profit, as well as profit before tax in FY2019 and FY2020. Reported RoE were also 26.9 percent, 18.6 percent, 16.1 percent and 4.2 percent in the AWA, UEMOA, CESA and Nigeria regions in 2020 (against 30.1 percent, 22.8 percent, 23.6 percent and 0.4 percent in 2019 respectively).
ETI’s overall performance depends on whether the results are reviewed from a Naira or Dollar perspective as some of the results were better in Naira than when reported in Dollars. The group lost about USD8.6 million as a result of exchange differences on foreign currency translation of foreign operations. ETI perhaps also seems to be affected by the poor performance of some of its acquisitions as well as its operations in some African countries where it has its presence.
Its earnings per share as of December 31, 2020 was 0.010 (cents) as against 0.778 (cents) for the same period in 2019.
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