Fitch Affirms eBay's (EBAY) L-T IDR, Rates Senior Note Offering at 'A'

Fitch Ratings affirms the long-term Issuer Default Rating (IDR) for eBay (Nasdaq: EBAY) at 'A' and rates the company's senior note offering at 'A'. The ratings affect approximately $5.3 billion of total debt, excluding the senior notes offering. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.

Fitch expects eBay will use net proceeds for general corporate purposes, including repayment of $1.2 billion of commercial paper borrowings used to partially fund share repurchases in the second quarter. Remaining net proceeds could be used for share repurchases, including $2.2 billion remaining under current share repurchase authorizations.

Fitch estimates total debt to operating EBITDA (total leverage) was 1 times (x) for the latest 12 months (LTM) ended June 30, 2014 and will remain below 1.5x over the long term. Total leverage could remain closer to 1.5x, driven by the potential incremental borrowings to fund ongoing share repurchases, given that free cash flow (FCF) is generated primarily overseas.

The ratings reflect eBay's gradual recovery from the cyber-attack during the second quarter that resulted in management reducing revenue guidance for 2014. eBay expects incentives and targeted marketing to accelerate Marketplace revenue growth in the second half of the year, which will augment solid top line growth at PayPal and a stabilized Enterprise business.

Direct costs associated with the cyber-attack, including investigation, remediation and incremental customer support and marketing expenses, totaled $46 million in the second quarter. Fitch expects eBay's cyber-security related expenses will increase going forward, but will not materially affect profitability. Unfavorable outcomes from regulatory investigations could be significant, but Fitch believes this is as a low probability event since no financial data was compromised.

Fitch expects $3 billion to $5 billion of annual free cash flow (FCF) through the intermediate term, driven by solid overall operating performance. Fitch believes the vast majority of FCF is generated overseas but that eBay will primarily use foreign cash to fund credit expansion, alleviating pressures on funding domestic cash uses, including share repurchases and acquisitions.

In addition, eBay's potential cash repatriation of $9 billion of foreign earnings no longer considered permanently reinvested could support domestic cash uses. The company accrued $3 billion for cash taxes in the second quarter that would be payable upon repatriation, resulting in $6 billion of incremental readily available domestic cash.

KEY RATING DRIVERS

Strengths include:
--Strong position and significant growth in on-line payments, particularly in mobile and off-line markets.
--Leading e-commerce platform.
--Significant and consistent FCF generation.
--Relatively conservative balance sheet management.

Concerns include:
--Potential split of company.
--Ongoing pressure for share repurchases in lieu of splitting PayPal and Marketplaces.
--Risk of eBay taking a more aggressive approach to acquisitions going forward.
--New technologies in the payments space are a potential long-term threat to PayPal. However, Fitch does not expect any material change in the competitive dynamics over the next few years.

RATINGS SENSITIVITIES:

Negative rating actions could occur from:

--Plans to separate PayPal from eBay Marketplaces, with expectations for materially greater leverage at the remaining Marketplaces business.

--Normalized FCF to total adjusted debt falls close to the 20% level.

Fitch believes positive rating actions are unlikely given continued activist involvement that could ultimately result in a spinoff of the PayPal business longer term.

Fitch believes sufficient financial and operational synergies existing between PayPal and Marketplaces in the intermediate term. However, these are likely to diminish longer term given continued significant growth in PayPal outside of the Marketplaces platform.

eBay's liquidity as of June 30, 2014, excluding the senior notes issuance, was strong and supported by approximately $3.8 billion of cash and equivalents and $3.5 billion of short-term investments. Additionally, the company has $6.2 billion of long-term investments.

Fitch believes offshore cash will continue to build since a higher proportion of the company's cash flow is generated outside the U.S. due to stronger growth in international markets. eBay has a structure in place to utilize some of its offshore cash to fund the majority of its Bill Me Later receivables.

Liquidity is further supported by $1.8 billion of availability, net of $1.2 billion of outstanding commercial paper, under a $3 billion revolving credit facility maturing on November 2016. The RCF fully backstops the company's $2 billion CP program. Fitch's expectation for $3 billion to $5 billion of annual FCF also supports liquidity.

Total debt as of June 30, 2014 was $5.3 billion and included;

--$1.2 billion of CP borrowings;
--$600 million 1.625% notes due October 2015;
--$250 million of 0.7% notes due July 2015;
--$1 billion of 1.35% notes due July 2017;
--$500 million 3.25% notes due October 2020;
--$1 billion of 2.6% notes due July 2022; and
--$750 million of 4.0% notes due July 2042.

Fitch has affirmed eBay's ratings as follows:

--Long-term IDR at 'A';
--Senior unsecured notes at 'A';
--Short-term IDR at 'F1';
--$2 billion commercial paper program at 'F1'.

Fitch also has assigned the following ratings:

--Senior unsecured notes offering at 'A';
--Senior unsecured revolving credit facility at 'A'.

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