-- 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
-- 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.
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
According to the company, it will use proceeds for general corporate purposes.
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
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
-- 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.
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
-- 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
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
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
5446217&rev_id=3&sid=1007151&sind=A&", April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Corporate Credit Rating AA-/Stable/--
Unlimited Rule 415 Shelf
Senior Unsecured AA-(prelim)
$500M sr unsecd nts due 2015 AA-
$1.0B sr unsecd nts due 2017 AA-
$1.0B sr unsecd nts due 2022 AA-