Retail giant Wal-Mart Stores is taking advantage of low interest rates and a strong credit rating to raise $1.75 billion in cash which it says will be used for general corporate purposes.
Details from the debt issuance were recently made public in a federal filing with the Securities and Exchange Commission.
The company will issue $1 billion of debt bearing an interest rate of 1.95% which is due in 2018. These five-year notes were assigned “AA” rating by Fitch Ratings. In addition, the retailer also issued $750 million in 30-year bonds bearing an interest rate of 4.750%
Deutsche Bank, Merrill Lynch, RBS Securities, Credit Suisse, HSBC Securities and Wells Fargo are acting underwriters of the debt.
The 5-year notes will be priced to the public at a slight discount to par equaling $998.1 million before the underwriting and transaction expense. The 30-year bonds were priced at 99.304% of par. After underwriting fees and transactions costs Wal-Mart should net roughly $1.733 million from their sale to the public, according to the filing.
Fitch Ratings has assigned a rating of “AA” to both issues and gave the corporation a “Stable” rating outlook.
Wal-Mart Stores reported total current liabilities of $72.214 billion as of July 31, debt was down from $68.315 billion in the prior year. Short-term borrowings totaled $8.639 billion as of July 31, up 41.8% from July last year. Wal-Mart has $4.692 billion owed within one year of July 31.
Long-term debt totaled $40.678 billion in July, compared from $41.202 in the prior-year. Following the new underwriting that long term debt will be roughly $42.411 billion, up 2.93% from a year ago.
Fitch said steady operating results have enabled Wal-Mart to generate stable credit metrics over time, with adjusted debt of 1.7 to 2 times its net gross earnings (EBITDA)
over the past five years.
The rating firm said Wal-Mart will need to keep the debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio at or under 2% to maintain its “AA” rating.
“An upgrade is unlikely, given that the rating is currently at the high end of the rating spectrum and fully captures the company's financial and qualitative strengths,” Fitch noted in its report.
Fitch notes a downgrade could be triggered by any of the following:
• A debt-financed acquisition or accelerated share repurchases that pushed adjusted leverage ratios about 2% for an extended period;
• Persistent weak comp store sales; and
• More compression in gross margin that cannot be offset by expense leverage.
Despite soft top-line results, Wal-Mart has been able to maintain a steady operating margin at or near 6% (5.9% in quarter ended July 31, 2013), according to Fitch.
Analysts said modest gross margin pressure has been offset by expense leverage and going forward, Fitch expects operating margins will remain consistent with historical levels.