E-commerce bonds: a relative value analysis
Senior Fixed Income Strategist
Summary: E-commerce bonds offer in average lean leverage and healthy credit ratios. While the average yield across maturities in euro is near zero, in US dollar it's around 1.7% with some companies offering yields well above 3%. We find that corporates with exposure to the hospitality sector offer the highest risk amid the Covid-19 pandemic with Expedia most likely to suffer from a rating downgrade in the coming months. Credit quality of the rest of e-commerce corporates is high offering safe assets within the investment-grade space.
Following Peter’s analysis of e-commerce stocks, I would like to analyze the bonds that are offered by this sector.
Not all of the companies indicated by Peter have bonds; however, for those that do, we find that they offer an average yield of 1.7% in US dollar and near-zero yields in euro. Of course, bond yields vary vastly according to the duration and rating of a bond. Still, such a low average yield indicates that e-commerce credits are qualitatively high. For simplicity, in this analysis, we will analyze only US dollar bonds as near-zero yields offered by euro bonds makes them less exciting.
The bond list is characterized by notes with an investment-grade rating except for Tripadvisor and Angi Homeservices, and offer maturities ranging from 2021 until 2060.
Looking at the fundamentals, we immediately see that, on average, e-commerce corporates are sound with lean leverage. Nevertheless, it is not the case for Expedia (S&P: BBB-; Moody’s Baa3) which offers the highest leverage with a net debt to EBITDA of 4.38x compared to the list's median of -1.55x. Besides, the company's credit conditions look shaky compared to other investment-grade peers because of its high negative operating margins.
Also Tripadvisor (S&P: B-; Moody’s B1) doesn't shine, as it presents negative operating margins as well as negative interest coverage. It is important to note, however, that in contrast with Expedia, Tripadvisor is rated as junk. Hence, Expedia is exposed to a downgrade risk while Tripadvisor is not. With this in mind, Tripadvisor US dollar notes with maturity 2025 (USU8966TAA61) offer a yield close to 5%, while Expedia notes with similar maturities (USU3010DAH36) offer around 200bps less.
It is important to note that Tripadvisor, Expedia and Booking Holdings operate in the hospitality business. Therefore, if countries' lockdown measures amid the Covid-19 pandemic continue to restrict the movement of people, we can expect the fundamentals of these companies to deteriorate further. Within this context, Booking Holdings looks to be in better conditions to weather the crisis compared to the two, with a good rating of A- (S&P), and healthy credit ratios. However, quality doesn't come cheap as investors will get only 2% in yield for a 10-year note (US09857LAR96).
The company that looks to be offering the best tradeoff between risk and reward it is Angi Homeservices. Angi is active within the home services digital market place. Even though it is rated junk by Moody's and S&P (Ba3; BB-), the company has healthy leverage and good interest coverage ratio, even once capital expenditures are taken into account. It is important to note that Angi is a much smaller company compared to peers. Hence, its notes bring much higher liquidity and refunding risk compared to others. The company offers only bonds with 2028 maturity (USU0035LAA71), which offer a yield of 3.6%, around 40bps points higher than Expedia's bonds with similar maturity (US30212PAP09).Looking away from higher-yielding e-commerce companies, the list offers high quality and safe investments. The two companies that stand out in terms of quality are Amazon and Alibaba. Alibaba provides a higher yield for bonds of the same maturity. Still, the credit quality of the company is way better than Amazon, as it is characterized by higher operating margins and interest coverage and a negative net debt to EBITA. The Alibaba 2037 (US01609WAU62) offers a yield of 2.7% compared to Amazon 2037 (US023135BF28), which offer only 2.1% in yield.
|ANGI GROUP LLC||USD||8/15/2028||BB-||3.875%||3.6%||50k||USU0035LAA71|
|ALIBABA GROUP HOLDING||USD||12/6/2027||A+||3.400%||1.6%||200k||US01609WAT99|
|ALIBABA GROUP HOLDING||USD||11/28/2024||A+||3.600%||1.0%||200k||US01609WAQ50|
|ALIBABA GROUP HOLDING||USD||12/6/2047||A+||4.200%||2.9%||200k||US01609WAV46|
|ALIBABA GROUP HOLDING||USD||11/28/2021||A+||3.125%||0.3%||200k||US01609WAP77|
|ALIBABA GROUP HOLDING||USD||12/6/2057||A+||4.400%||2.9%||200k||US01609WAW29|
|ALIBABA GROUP HOLDING||USD||12/6/2037||A+||4.000%||2.7%||200k||US01609WAU62|
|ALIBABA GROUP HOLDING||USD||11/28/2034||A+||4.500%||2.4%||200k||US01609WAR34|
|ALIBABA GROUP HOLDING||USD||6/6/2023||A+||2.800%||0.6%||200k||US01609WAS17|
|ALIBABA GROUP HOLDING||USD||11/28/2024||A+||3.600%||1.0%||200k||USG01719AE63|
|ALIBABA GROUP HOLDING||USD||11/28/2021||A+||3.125%||0.5%||200k||USG01719AA42|
|ALIBABA GROUP HOLDING||USD||11/28/2034||A+||4.500%||2.4%||200k||USG01719AF39|
|BOOKING HOLDINGS INC||USD||4/13/2030||A-||4.625%||2.1%||50k||US09857LAR96|
|BOOKING HOLDINGS INC||USD||4/13/2025||A-||4.100%||1.1%||50k||US09857LAP31|
|BOOKING HOLDINGS INC||USD||6/1/2026||A-||3.600%||1.3%||50k||US741503AZ91|
|BOOKING HOLDINGS INC||USD||4/13/2027||A-||4.500%||1.6%||50k||US09857LAQ14|
|BOOKING HOLDINGS INC||USD||3/15/2023||A-||2.750%||0.7%||50k||US741503BB15|
|BOOKING HOLDINGS INC||USD||3/15/2025||A-||3.650%||1.1%||50k||US741503AW60|
|BOOKING HOLDINGS INC||USD||3/15/2028||A-||3.550%||1.7%||50k||US741503BC97|
|EXPEDIA GROUP INC||USD||2/15/2030||BBB-||3.250%||3.2%||50k||US30212PAR64|
|EXPEDIA GROUP INC||USD||2/15/2028||BBB-||3.800%||3.2%||50k||US30212PAP09|
|EXPEDIA GROUP INC||USD||2/15/2026||BBB-||5.000%||2.9%||50k||US30212PAM77|
|EXPEDIA GROUP INC||USD||5/1/2025||BBB-||7.000%||1.8%||50k||USU3010DAJ91|
|EXPEDIA GROUP INC||USD||8/15/2024||BBB-||4.500%||2.0%||50k||US30212PAJ49|
|EXPEDIA GROUP INC||USD||5/1/2025||BBB-||6.250%||3.1%||50k||USU3010DAH36|
|EXPEDIA GROUP INC||USD||12/15/2023||BBB-||3.600%||2.2%||50k||USU3010DAK64|
|EXPEDIA GROUP INC||USD||8/1/2027||BBB-||4.625%||3.4%||50k||USU3010DAL48|
|EXPEDIA GROUP INC||USD||2/15/2030||BBB-||3.250%||3.1%||50k||USU3010DAG52|
|EXPEDIA GROUP INC||USD||2/15/2026||BBB-||5.000%||3.0%||50k||USU3010DAE05|
|BOOKING HOLDINGS INC||EUR||3/3/2027||A-||1.800%||0.4%||100k||XS1196503137|
|BOOKING HOLDINGS INC||EUR||9/23/2024||NR||2.375%||0.1%||100k||XS1112850125|
|BOOKING HOLDINGS INC||EUR||3/10/2022||A-||0.800%||-0.3%||100k||XS1577747782|
|BOOKING HOLDINGS INC||EUR||11/25/2022||A-||2.150%||-0.2%||100k||XS1325825211|
|EXPEDIA GROUP INC||EUR||6/3/2022||BBB-||2.500%||0.5%||100k||XS1117297512|