NEW YORK--()--Fitch Ratings has affirmed eBay, Inc.'s (eBay) Issuer Default Rating (IDR) and debt ratings. The Rating Outlook is Stable.
The affirmations are based on the company's leading e-commerce platform; its strong position in on-line payments as well as the significant potential growth opportunities for that business both on- and off-line; its significant and consistent free cash flow generation; and its relatively conservative balance sheet management.
eBay's ratings and Outlook reflect the following considerations:
--eBay boasts market-leading online commerce (eBay Marketplaces) and payments (PayPal) businesses. The company's conservative financial policies and credit protection measures, as well as strong financial flexibility and liquidity highlighted by a free cash flow (FCF) conversion rate in excess of 20% of revenues further support the ratings and outlook.
--Fitch expects PayPal's transaction-based operating model will continue to benefit from an increasing share of e-commerce transactions. Additionally, as PayPal usage further expands beyond eBay Marketplaces, PayPal income and cash flow should further mitigate potential cyclicality in Marketplaces.
--Fitch expects eBay will maintain strong credit metrics and a conservative capital structure with core leverage (net of financing any consumer receivables) at approximately 1.0 times (x) and a disciplined approach to acquisitions. Fitch estimates that leverage (total debt / total operating EBITDA) is approximately 0.7x which includes approximately $700 million of debt supporting receivables at Bill Me Later (BML) as well as $300 million of debt used to partially finance the recent acquisition of GSI Commerce, Inc. (GSI).
--Fitch expects EBITDA and FCF, $3.5 billion and $2.3 billion, respectively, for the LTM period ended Sept. 30, 2011, to grow modestly in 2012 subject to uncertain economic headwinds. In a typical cyclical downturn, Fitch would expect these metrics to be flat to slightly down, aided by continued secular growth in the PayPal business.
Credit concerns include:
--Potential to separate PayPal from eBay, particularly as PayPal gains greater acceptance outside eBay Marketplaces. Fitch believes that over the long-term, PayPal represents a stronger credit profile due to a more stable business, more defensible market position and the business need for a strong rating to access cost effective capital. Note that Fitch does not believe that the current bond indenture has a material restriction on asset divestitures.
--The longer-term competitive threat to PayPal of new market entrants and new payment technologies, particularly if technologies such as mobile phone payments gain a foothold in the traditional brick and mortar world.
--Competitive dynamics negatively impacting growth of the Marketplaces business and the increased acquisition risk as the company continues to diversify internationally.
--Risk of eBay strategically deciding to sacrifice profit margin and cash flow generation in its Marketplaces segment in search of higher revenue growth rates either through new pricing initiatives or acquisitions.
--An increase in consumer lending services (via growth of BML), including the possibility of debt issuance to support expected increases in finance receivables.
As of Sept. 30, 2011, eBay's liquidity was strong and supported by approximately $4 billion of cash and equivalents and short-term investments, a majority of which was located overseas. Additionally, the company has $3 billion of long-term investments. Fitch believes a greater share of eBay's cash position will be located overseas in the future as a higher proportion of the company's cash flow is generated outside the U.S. due to stronger growth in international markets.
Liquidity is further supported by a $1.8 billion revolving line of credit maturing on Nov. 7, 2012 and FCF in excess of $2 billion in the LTM period ended Sept. 30, 2011. eBay's credit facility fully supports its $1 billion commercial paper program which was fully utilized at the end of September 2011, reducing availability on the credit facility to approximately $0.8 billion.
Fitch anticipates that FCF and excess cash on the balance sheet including the potential future monetization of investments will be utilized for acquisitions, investments, and stock repurchases. In September 2010, the company's Board of Directors authorized $2 billion in incremental share repurchases. Authorized amount remaining as of Sep 30, 2011 was $1.1 billion.
Total debt as of Sept. 30, 2011 was $2.5 billion and included $400 million 0.875% notes due October 2013, $600 million 1.625% notes due October 2015 and $500 million 3.25% notes due October 2020 as well as $1 billion in commercial paper outstanding.
Fitch has affirmed the following ratings for eBay:
--Long-term IDR at 'A';
--$400 million 0.875% senior unsecured notes due 2013 at 'A';
--$600 million 1.625% senior unsecured notes due 2015 at 'A';
--$500 million 3.25% senior unsecured notes due 2020 at 'A';
--Short-term IDR at 'F1';
--$1 billion 4(2) commercial paper program at 'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 13, 2010;
--'Evaluating Corporate Governance', dated Dec. 16, 2010;
--'Rating Global Technology Companies Sector Credit Factors', dated Sept. 20, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
Rating Global Technology Companies - Specific Rating Factors