Moody's Downgrades eBay (EBAY) to 'Baa1' Following PayPal Spin

Moody's Investors Service, Inc. ("Moody's") has downgraded eBay's (Nasdaq: EBAY) long term issuer and senior unsecured ratings to Baa1 from A2 and short-term rating to Prime-2 from Prime-1. The rating outlook is stable.

These rating actions conclude the review for downgrade initiated on September 30, 2014 following eBay's announcement of its plan to spin-off of its PayPal subsidiary.

RATINGS RATIONALE

The ratings downgrade reflects a weaker, though still strong, credit profile post the spin-off with higher financial leverage, reduced business diversity after the separation of the faster growing PayPal business and Moody's expectation of continued shareholder friendly actions. Moody's believes that gross leverage will rise to about 3x by the end of 2015 (up from 1.3x at December 2014) as the existing debt remains with eBay, profits decrease by more than one third with the spin-off of PayPal, and additional debt is raised to support stock buybacks.

Moody's expects that without the need to fund the PayPal Credit loan portfolio, eBay's financial policies will be more aggressive with a focus on restoring higher revenue growth (potentially supplemented by M&A activity) and allocating large amounts of capital to shareholder returns. Moody's also believes that eBay will face increasing competition from larger companies with significantly greater enterprise values such as Amazon, Alibaba, Google, and brick and mortar retailers such as Walmart. Competitive pressures could diminish the historically high profit margins (e.g., adjusted operating margins of about 35% for eBay's Marketplaces business) due to rising advertising and marketing costs.

eBay's Baa1 rating is supported by high brand awareness, a strong market position in the growing online e-commerce space, significant scale in terms of revenue (projected annual revenues approaching $9 billion in 2016), the global number of users and sellers, and the networking stickiness of its various marketplace sites. While eBay faces some near term top line challenges as it rebounds from a data security breach and Google's search engine algorithm changes, Moody's projects mid-single digit revenue growth in constant currency for 2016 and 2017 supported by global economic growth and the high penetration opportunities of online retail sales.

The rating also reflects eBay's very strong liquidity. Moody's expects eBay to continue to generate substantial free cash flow of over $2 billion annually and maintain a substantial amount of cash and liquid investments resulting in a net cash (or neutral) position. The vast majority of the nearly $10 billion of projected cash (including net proceeds from the pending sale of the Enterprise business for $925 million), however, is located in foreign entities. Although the offshore cash provides excellent liquidity support, Moody's does not view the offshore cash (net of repatriation taxes) to be a full offset to debt given its other potential uses such as acquisitions and share repurchases.

The stable outlook reflects Moody's expectation that eBay will continue to maintain and defend its strong market position in the online marketplaces space with mid-single digit revenue growth beginning in 2016 and operating margins in the low 30% range. Moody's also expects that management will maintain significant liquidity and financial flexibility, which is important to contend with the rapidly evolving e-commerce sector.

The ratings could be upgraded if eBay preserves its strong competitive position in its marketplace segment, improves its operating performance (e.g., double digit revenue growth with operating margins in the mid 30% range), reduces debt to EBITDA to below 1.5x on a sustained basis, and maintains its robust liquidity. The ratings could be lowered with expectations of a more aggressive financial policy that results in sustained higher financial leverage above 3.5x, deteriorating internal liquidity, or significant loss of market share.

Ratings downgraded:

Long term issuer rating -- Baa1 from A2

Senior unsecured rating -- Baa1 from A2

Senior unsecured shelf rating -- (P)Baa1 from (P)A2

Commercial paper rating -- Prime-2 from Prime-1

eBay is a leading worldwide provider of online marketplaces for the sale of goods and services.

The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

You May Also Be Interested In

• Morgan Stanley Double Upgrades eBay (EBAY) to Overweight
• Citi Upgrades Sirius XM Radio (SIRI) to Neutral, 'risk-reward is balanced at prevailing levels'
• Sherwin-Williams (SHW) PT Raised to $310 at Baird