Fitch Rates eBay's $1.5B Unsecured Note Offering 'A'; Outlook Stable
By: eBay Inc. Staff
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to eBay's proposed issuance of up to $1.5 billion in senior unsecured notes. eBay expects to issue the notes with a combination of three-year, five-year and 10-year maturities. The company expects to use the proceeds from the offering for general corporate purposes which Fitch believes could include acquisitions, working capital, share repurchases and the financing of consumer receivables in its Bill Me Later (BML) business. The company had no debt outstanding prior to this offering which also represents eBay's first public debt issuance.
Fitch currently rates eBay as follows:
--Long-Term Issuer Default Rating (IDR) 'A';
--Senior unsecured debt 'A';
The Rating Outlook is Stable.
The ratings and Stable Outlook reflect:
--eBay Inc.'s (eBay) market-leading online commerce and payments businesses, principally eBay Marketplaces and PayPal, respectively. 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 the range of 25% 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 or below approximately 1.0 times (x) and a disciplined approach to acquisitions. Fitch estimates that leverage (total debt / total operating EBITDA), pro forma for this offering, would be approximately 0.5x.
--Fitch expects EBITDA and FCF, $3.2 billion and $2 billion, respectively, for the LTM period ended Sept. 30, 2010, to grow upwards of 10% in the current economic environment.
Credit concerns center on competitive dynamics negatively impacting growth of the Marketplaces business and the increased acquisition risk inherent in the company's strategy of sourcing growth outside its domestic market; an increase in consumer lending services (via growth of BML), including the possibility of debt issuance to support expected increases in finance receivables; and the longer term competitive threat to PayPal of new market entrants and new payment technologies.
Key rating drivers include:
--Strong competitive position of Markets segment. The company's Markets segment comprises two-thirds of total revenue, the majority of which comes from the global network of eBay.com websites. While there are generally limited barriers to entry for this business, the company holds a strong market position given its track record of customer service and the pools of buyer/seller liquidity it provides. Despite some pushback on increased pricing over the years, the company continues to benefit from a loyal seller base that enabled transaction volumes to remain largely steady over the past several years in the wake of increased competition from the likes of Amazon.com as well as the recent economic downturn. While eBay faces stiff competition from other e-commerce outlets and traditional retailers, the company's niche of used, antique, and out-of-season inventory sold under an auction- or fixed-price format help to differentiate it, particularly with individual sellers and smaller retailers.
--eBay.com's feedback forum creates barriers to entry with sellers becoming more 'sticky' as they accumulate a history of transactional feedback that buyers use when assessing a potential purchase. This makes it more difficult for large sellers to abandon the eBay sites for a competitor. The sites also offer seller and buyer incentive programs that create loyalty among its users. Fitch expects niche competitors for specific merchandise items to exist side-by-side with eBay as opportunity costs encourage sellers to list items across multiple sites (e.g. most car dealerships will post on eBay in addition to Cars.com and Autotrader.com).
--Continued momentum and acceptance of PayPal. The company's PayPal segment continues to gain worldwide acceptance as an e-commerce platform. For the 12 months ending Sept. 30, 2010, Fitch estimates that approximately 60% of PayPal's total dollar volume was driven by third-party sites. Merchants have an incentive to offer PayPal since it is typically cheaper and has shorter processing times than most credit cards. Additionally, PayPal offers fraud prevention to the merchants. From a consumer standpoint, PayPal is attractive since confidential information does not need to be shared with e-commerce platforms.
PayPal offers various forms of payment for the consumer: cash deposits, debit cards, bank wires, credit cards, and BML. The cash deposits generate the lowest risk for the company and the highest margins. While credit card payments generally produce the lowest margins, Fitch believes that PayPal would be able to pass through future increases in credit card fees.
--Moving into consumer lending business. Through the company's purchase of the BML platform, eBay entered into the consumer lending business. BML is a relatively small consumer lending platform ($767 million in loans outstanding as of Sept. 30, 2010). Fitch believes this is a natural extension of the PayPal product offering and could be expanded significantly in a short period. However, it alters the company's risk profile with increased exposure to consumer credit.
Since BML is not a chartered financial institution, it is reliant on a third-party bank to extend loans. While BML's partner bank is responsible for credit risk management and credit approvals, it is BML that ultimately assumes the credit risk since it immediately purchases the accounts receivables. BML previously had an accounts receivable securitization facility in place to help it fund its receivables; however, it currently is undrawn. Writeoffs had declined to 7.3% in the quarter ended Sept. 30, 2010 from 10.7% for all of 2009.
--Acquisitive history. The company has historically expanded its geographic revenue base and product offerings via acquisitions, usually via cash and sometimes with stock. Fitch expects the company's acquisition focus to continue with the potential for increased use of debt financing. Except for Skype (which the company divested in November 2009), historical acquisitions since PayPal were add-ons to eBay's business model of auctions, shopping and online payment processing, along with expanding into local markets. Additionally, Fitch believes there is increased potential for significant stock repurchases via excess cash flow and/or existing cash on the balance sheet.
As of Sept. 30, 2010, eBay's liquidity was strong and supported by approximately $5.4 billion of cash and equivalents and short-term investments, a majority of which was located overseas. Additionally, the company has $2.1 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 ($0 million outstanding) maturing on Nov. 7, 2012 and FCF in excess of $1.9 billion in the LTM period ended Sept. 30, 2010. The credit facility agreement requires the company to maintain a consolidated leverage ratio (debt/EBITDA) of less than 3.0x. 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. The company's Board of Directors recently authorized $2 billion in incremental share repurchases bringing total repurchase authorization to approximately $2.4 billion as of Sept. 30, 2010.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 13, 2010;
--'Liquidity Considerations for Corporate Issuers', dated June 12, 2007;
--'Cash Flow Measures in Corporate Analysis', dated Oct. 12, 2005;
--'Evaluating Corporate Governance', dated Dec. 12, 2007.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers
Cash Flow Measures in Corporate Analysis
Evaluating Corporate Governance