Wal-Mart Bonds Fly Off Shelf as Shoppers Stew: Corporate Finance

Wal-Mart Stores Inc. is winning the lowest borrowing costs this year as its AA credit rating offsets challenges from a corruption probe to reports of thinly stocked shelves.

The world’s largest retailer, which has $5 billion of debt maturing through October, yesterday sold an equal amount of bonds in a four-part offering that included the lowest coupon on three-year notes in 2013, according to data compiled by Bloomberg. Wal-Mart’s sale adds to a supply of AA rated debt that has declined to 11 percent of the $4 trillion U.S. corporate market from 18 percent three years ago.

Wal-Mart, whose annual free cash flow exceeds the market values of about half the companies in the Standard & Poor’s 500 stock index, is succeeding in the bond market even after forecasting quarterly same-store sales won’t improve from a year earlier. The Bentonville, Arkansas-based retailer is also contending with a federal investigation into whether it systematically bribed Mexican officials and customer complaints of deteriorating service.

“The stable free cash flow is the major driver,” James Goldstein, an analyst at CreditSights Inc. in New York, said in a telephone interview. “I don’t think people are too concerned about the headlines.”

Narrowest Spread

Wal-Mart’s sold $1 billion of 0.6 percent notes due April 2016 that yield 30 basis points more than similar-maturity Treasuries. That’s the narrowest spread for similar-maturity corporate debt this year, eclipsing the 35 basis-point gap awarded to GlaxoSmithKline Plc, PepsiCo Inc. and Praxair Inc., Bloomberg data show.

The three-year notes rose 0.23 cent on the dollar to 100.22 cents and yielded 0.53 percent at 10:50 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The deal also included $1.25 billion of 1.125 percent debt maturing in April 2018, $1.75 billion of 2.55 percent, 10-year debt and $1 billion of 30-year securities that pay a 4 percent coupon to match the 2013 low previously recorded by Medtronic Inc. and Anheuser-Busch InBev NV. The 2043 notes rose 2.4 cents to 102.6 and yielded 3.85 percent at 11:47 a.m.

“Wal-Mart remains committed to maintaining a strong balance sheet, which combined with our solid free cash flow and AA credit rating helped us secure favorable coupons,” said Randy Hargrove, a company spokesman.

Interest Cost

Each of Wal-Mart’s coupons are lower than the average for similar-maturity debt ranked AA, at least seven levels above speculative grade, as of April 3, according to prices compiled by Bloomberg. Wal-Mart is rated Aa2 by Moody’s Investors Service and an equivalent AA by Standard & Poor’s.

The company’s weighted average coupon of 2.09 percent on yesterday’s transaction is about half the 4.02 percent paid on its $3.69 billion of dollar-denominated debt maturing this year, Bloomberg data show.

“They’re going to slash their interest expense with this issue,” said Nikhill Patel, an analyst at San Antonio-based Frost Investment Advisors LLC, which oversees $9 billion. “Investors are drawn to the strong free cash flow and operating margins that Wal-Mart generates.”

Wal-Mart’s $12.7 billion of free cash in the 12 months ended Jan. 31 is more than eight times the funds generated by Costco Wholesale Corp., the largest U.S. warehouse club. An operating margin of 5.93 percent exceeds every U.S. food and staples retailer with market values bigger than $5 billion except Whole Foods Market Inc., Bloomberg data show.

Facing Obstacles

Before yesterday’s sale, Wal-Mart’s debt underperformed similarly rated bonds this year. A price decline of 1.82 percent for the company’s notes compares with a 0.7 percent drop in AA rated securities, according to Bank of America Merrill Lynch index data.

The company is facing obstacles. A decline in the retailer’s U.S. workforce even as it opens new stores has coincided with customer frustration that there aren’t enough employees to keep shelves stocked, cash registers manned and shoppers’ questions answered. Staffing at Wal-Mart and Sam’s Club outlets in the U.S. has declined by about 120,000 employees since 2008 to 1.3 million, according to regulatory filings. In the same period, the number of stores grew to 4,005 from 3,550, the documents show.

That’s benefited companies such as Target Corp., which has an operating margin of 7.11 percent, as customers seek alternatives.

‘Execute Superbly’

Wal-Mart’s in-stock shelf availability is at historically high levels and averages between 90 percent and 95 percent, Hargrove said.

Same-store sales for Wal-Mart’s U.S. locations in the 13 weeks ending April 26 will be little changed from a year earlier, Bill Simon, chief executive officer of Wal-Mart U.S., said on a Feb. 21 teleconference to discuss fourth-quarter results with analysts and investors.

The company, which spent $157 million in the year ended Jan. 31 linked to its investigations of possible bribery in its international operations, said last month that it expects to continue incurring costs related to the probes. The U.S. Department of Justice and the Securities and Exchange Commission, as well as federal and local government agencies in Mexico, are also examining bribery allegations.

While Wal-Mart doesn’t expect those matters to have a material adverse effect on its business, the company said it can’t reasonably estimate the potential loss.

“Most of the issues people raise are issues that a shareholder might care about but not a bondholder,” said Carol Levenson, director of research at Chicago-based Gimme Credit LLC, which rates Wal-Mart’s debt “stable.” “This is perhaps the strongest, steadiest retailing credit out there. They know what they’re doing and generally they execute superbly.”