TEXT - S&P rates Amazon.com new shelf and notes

Mon Nov 26, 2012 1:19pm EST

Related Topics

Overview
     -- U.S.-based Internet retailer Amazon.com Inc. has filed an
unlimited Rule 415 shelf registration for debt securities and is proposing to
issue $500 million of notes due 2015, $1.0 billion of notes due 2017, and $1.0
billion of notes due 2022.
     -- We are assigning our 'AA-' corporate credit rating to the company, 
reflecting our expectation for continued strong performance and credit 
measures.
     -- We are also assigning our preliminary 'AA-' senior unsecured and 
preliminary 'A+' subordinated debt ratings to the Rule 415 shelf registration 
and our 'AA-' issue-level rating to the note issues.
     -- The stable rating outlook reflects our view that the company will 
maintain its solid operating performance and that credit metrics should 
modestly improve over the next year.

Rating Action
On Nov. 26, 2012, Standard & Poor's Ratings Services assigned its `AA-' 
corporate credit rating to Seattle, Wash.-based Amazon.com Inc. The rating 
outlook is stable. 

At the same time, we assigned our preliminary 'AA-' to the company's senior 
unsecured debt and our preliminary 'A+' to its subordinated debt under the 
unlimited Rule 415 shelf registration for debt securities.

Concurrently, we assigned our 'AA-' issue-level rating to Amazon's proposed 
$500 million senior unsecured notes due 2015, $1.0 billion of notes due 2017, 
and $1.0 billion of notes due 2022, which are a drawdown from the shelf 
registration.

According to the company, it will use proceeds for general corporate purposes.

Rationale
The rating on Amazon.com reflects our assessment that its business risk 
profile is "strong" and its financial risk profile is "minimal." The business 
risk profile reflects the company's position and strong name-brand as the 
largest e-commerce retailer in the world, its broad and deep merchandise 
offerings, its well-diversified world-wide operations, its experienced 
management team, and its geographic diversity. We believe these strengths far 
more than offset some of the risks from a rapid growth strategy, margin 
erosion due to significant investment in infrastructure and the drag of 
shipping costs exceeding shipping revenues, and possible technology missteps. 
Based on this, we see no danger to Amazon's leading market position and our 
assessment that the business risk profile will remain strong over the next 
several years. Our analysis that Amazon will maintain modest debt leverage, a 
strong cash cushion, significant cash flow generation, the capital efficiency 
of its operating cycle, and solid credit-protection ratios based on a 
conservative financial policy all point to "minimal" financial risk.

Amazon has succeeded in creating a strong brand, which is critical to the 
long-term success of any retailer selling goods through the Internet. Its 
focus on convenience, service, selection, and content, combined with its 
low-pricing strategy, has enabled it to increase revenues by a 34% compound 
annual rate over the past five years. In our view, prospects for further 
growth are very favorable, and we see no significant impact on demand from an 
expected broadening of the requirement for Amazon to collect sales tax. 

We score Amazon's management and governance as "strong," driven by our 
positive views of the company's strategic positioning, consistency of its 
financial and risk management, and organizational effectiveness. A 
demonstrated history of earnings and significant cash flow generation, along 
with a track record of market leadership and successful innovation, support 
our opinion.

Adjusted EBITDA margin remains pressured, declining to 5.7% as of Sept. 30, 
2012, from 5.9% in the prior year due to lower prices on certain products; 
higher fulfillment, transportation, and marketing expenses; and increased 
investment in fulfillment centers. We believe margins likely will remain in 
the 5% to 6% range as the company continues to invest in lowering prices to 
drive sales and adds lower-margin products and categories. Furthermore, higher 
transportation costs and continued investment in additional fulfillment 
centers, technology, and content will likely pressure margins over the next 
two years. Still, better economies of scale and purchasing power should 
partially offset these factors.

Specifically, our forecast for Amazon includes the following assumptions:
     -- Revenues increase by about 35% in 2012 and 34% in 2013. 
     -- Gross margin of 27% in 2012 , and 27.4% by 2013 year-end.
     -- Selling, general, and administrative expenses grow 45% in 2012 and 
about 38% in 2013 as the company continues its significant investment in its 
fulfillment centers.
     -- Capital expenditures of $2.75 billion in 2012 and $1.8 billion in 2013.
     -- Acquisitions of $800 million in 2012 and none in 2013.
     -- Share repurchases of $960 million in 2012 and $500 million in 2013.

We believe continued good performance and investment will result in stable 
credit-protection metrics over the intermediate term. Although accounts 
payable are high, given the capital efficiency of Amazon's operating model and 
its well diversified operations, in our opinion, structural subordination is 
not an issue. As of Sept. 30, 2012, EBITDA interest coverage was 14.7x, total 
debt to EBITDA was 1.4x, and funds from operations to total debt was 
61.4%--levels that are very solid for the rating. Unless there is an 
unforeseen change in management's financial policies, we expect credit metrics 
to remain very robust for the rating.

Liquidity
We believe Amazon has "exceptional" liquidity to meet its needs over the next 
two years. Our view of the company's liquidity incorporates the following 
expectations and assumptions:
     -- We expect liquidity sources (including cash and discretionary cash 
flow) to exceed uses by more than 2x over the next two to three years.
     -- We expect that liquidity sources will continue to exceed uses, even if 
EBITDA were to decline by 50%.
     -- We believe that the company could absorb, without refinancing, 
high-impact, low-probability events.
     -- In our assessment, the company has a generally high standing in the 
credit markets.
     -- In our view, Amazon has a very prudent financial risk management.

As of Sept. 30, 2012, cash and marketable securities were about $5.2 billion. 
Although inventory days increased to 38.6 from 35 days in the prior year, we 
do not expect it to change meaningfully in the near term given the expanded 
selection, higher in-stock levels, and the introduction of new categories, 
some of which are slower turning.

We expect the combination of significant cash generation from operations and 
cash on hand to be more than sufficient to cover ongoing capital expenditures 
and working capital needs. Although free operating cash flow declined 
significantly over the last three quarters as a result of higher capital 
spending, we estimate free operating cash flow of more than $1.7 billion by 
year-end 2012.

Outlook
Our stable rating outlook on Amazon reflects our expectation that business 
conditions will remain very favorable for online retailers, and that the 
company will continue to perform well over the intermediate term. We expect 
revenue growth to remain at or above 30% per year, that the expected 
broadening of the requirement for Amazon to collect sales tax will have 
little, if any, impact on demand, and that margins will remain in line with 
recent levels over the near term. We further believe that as long as 
management maintains a conservative financial policy, Amazon's "minimal" 
financial risk profile should enable it to weather economic deterioration 
without a meaningful diminution of credit-protection measures. 

Although unlikely, we could lower the rating if the company undertook 
significant share repurchases (more than $7.5 billion) to the extent that it 
would constitute a dramatic change in financial policy to include 
substantially more shareholder-friendly actions. We could consider upgrading 
the company if it continues to perform above our expectations, resulting in 
our favorably reassessing the company's business risk profile, though we do 
not think this is likely to occur over the near term.

Related Criteria And Research
     -- Management And Governance Credit Factors For Corporate Entities And 
Insurers, Nov. 13, 2012
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- 
"here
6881137&rev_id=1&sid=1007151&sind=A&", Sept. 28, 2011
     -- Key Credit Factors: Business And Financial Risks In The Retail 
Industry, Sept, 8, 2008
     -- 
"here
5446217&rev_id=3&sid=1007151&sind=A&", April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List

New Ratings
  
Amazon.com Inc.
 Corporate Credit Rating         AA-/Stable/--
 Unlimited Rule 415 Shelf
   Senior Unsecured              AA-(prelim)
   Subordinated                  A+(prelim)
 $500M sr unsecd nts due 2015    AA- 
 $1.0B sr unsecd nts due 2017    AA-
 $1.0B sr unsecd nts due 2022    AA-
FILED UNDER: