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Originally published Monday, October 13, 2008 at 12:00 AM

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Amazon pays off its historic debt early

Analysts thought Amazon.com would drown in debt. Instead, the Seattle e-tailer has paid off its historic convertible-bond offering early and is profitable.

Seattle Times business reporter

The last time the U.S. economy was headed for a recession, Amazon.com was so deep in debt that some feared the Internet retailer would go under.

Among them was Ravi Suria, then a bond analyst at Lehman Brothers who achieved Wall Street fame with a scathing report on Amazon in mid-2000.

A year earlier, Amazon had tapped the debt markets to raise $1.25 billion in a historic convertible-bond offer, and Suria questioned whether the Seattle company would ever become profitable. Amazon's stock plunged from the $40s to below $10 over the next 18 months.

Today, another recession looms, but Amazon is profitable, and the $1.25 billion convertible-bond issue is no longer: Amazon paid it off in September, nearly five months before a February 2009 deadline.

The company is estimated to report about $475 million in long-term debt when its third-quarter financial results are released later this month. That would be down from $874 million three months ago and translate to 21 cents for every dollar of shareholder equity as of June 30.

"Their financial position is definitely better than it was years ago. No question," said Dan Geiman, an analyst with McAdams Wright Ragen in Seattle. "It's a healthy balance sheet."

Geiman sees the reduction in Amazon's long-term debt — debt taken on for years rather than weeks or months — as a particularly positive development given the current credit crisis. "Companies that are in a net-cash position right now are better off than companies that have to go out and raise capital, which has become difficult," he said.

Convertible bonds gained popularity in the late 1990s because they allowed dot-coms like Amazon to borrow money at reduced cash-interest payments. (The bonds are exchangeable for company stock at a preset price.)

Amazon embarked on a major effort to pay off its 1999 offering last May when it made a call for $500 million, and again in August with its call for a remaining $399 million. Combining both calls, more than $605 million in debt was swapped for 7.8 million Amazon shares, and about $293 million was redeemed in cash.

"They're trying to say, 'We don't have so much debt on our balance sheet, so we can get through this recession without a problem,' " said Suresh Kotha, a University of Washington business professor who has studied Amazon.

Amazon's profit and sales gains have exceeded analysts' expectations so far this year. For the three-month period ended June 30, Amazon more than doubled its second-quarter profit to $158 million, or 37 cents a share, and posted a 41 percent increase in sales to $4.1 billion.

Chief Executive Jeff Bezos told analysts in a July conference call that Amazon might have an edge over other retailers because cash-strapped consumers could avoid high gas prices by shopping online rather than driving to brick-and-mortar stores. Bezos noted that Amazon also benefited from growth in its Amazon Prime program, which promises two-day shipping on all orders for a $79 annual fee.

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"Amazon has a large and loyal buyer base. They excel in customer service and have been doing a very good job expanding their selection and keeping prices competitive," said Colin Sebastian, who follows the company for Lazard Capital Markets in San Francisco.

"I wouldn't suggest they're immune to the economy, but I have little doubt that they're going to continue down a path of good growth."

Indeed, Amazon's stock has felt the effects of turmoil on Wall Street. Shares closed Friday at $56.25, down $38.41, or more than 40 percent, from a year ago.

As for Suria, the vocal critic from 2000, he left Lehman in 2001 to work for a hedge fund and now is a private money manager. Reached recently by phone in New York, he said he hasn't "looked at" Amazon for years.

"That was several lifetimes ago," he said.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

Copyright © 2008 The Seattle Times Company

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