Fitch downgraded eBay’s long-term Issuer Default Rating (IDR) and senior unsecured debt ratings to ‘A-‘ from ‘A’ on Wednesday. Also downgraded was the short-term ratings to ‘F2’ from ‘F1’ in this call. Furthermore, Fitch also placed eBay’s long-term ratings on Rating Watch Negative.
This may not seem like the end of the world, but some $10.5 billion of debt has been affected by the downgrade if you include eBay’s $3 billion revolving credit facility. eBay’s spin-off PayPal aims to give both companies higher earnings multiples as standalone entities versus the current valuation of the combined entity. eBay also announced new senior leadership for both eBay Marketplaces and PayPal upon separation.
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The rationale for credit ratings is often different or opposite of equity investors. Creditors want strength from the entire entity, whereas equity investors may opt for short-term gains rather than stable balance sheets for years into the future. Fitch said:
The downgrade reflects Fitch’s expectations for weakened credit protection measures pro forma for the transaction and decline in business diversity. New eBay, consisting of Marketplaces and the Enterprise businesses, will retain all $7.5 billion of existing debt, while operating EBITDA will decline by approximately $2 billion to $3.6 billion following the spin-off of PayPal. As a result, Fitch estimates pro forma total leverage (total debt to operating EBITDA) will increase to approximately 2-times compared with 1.2-times for the latest 12 months ended June 30, 2014.
Fitch also conveyed that the new Negative Rating Watch reflects the strong likelihood of the NewCo eBay adopting a more aggressive capital structure after its separation to support incremental shareholder returns. It also noted that the lack of strategic rationale to maintain strong investment grade ratings after divesting PayPal are a risk. The report’s guts include:
Fitch believes New eBay’s operating model supports an ‘A-‘ rating and the Negative Watch could be resolved without further downgrades should the company commit to managing total leverage below 2.0x post-separation.
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We will put the blame for the 2% drop to $55.46 in eBay’s common stock as being partly from downgrades but mostly from the broad market sell-off. eBay’s 52-week trading range is $48.06 to $59.70 and the consensus price target is just above $60.22.
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