INSIGHT-From robots to websites, British firms curb spending due to Brexit
* Investment plans frozen before referendum have now been scrapped
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-
* Investment plans frozen before referendum have now been scrapped
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