OREANDA-NEWS. Fitch Ratings has maintained the 'A-' long-term ratings for eBay, Inc. (eBay) on Rating Watch Negative in anticipation of the PayPal separation in the form of a tax-free spin-off in the second half of 2015. Fitch also has affirmed the short-term ratings at 'F2'.

The ratings affect approximately \$10.5 billion of debt, including the \$3 billion revolving credit facility (RCF). A full list of current ratings follows at the end of this release. This release and the maintenance of the Watch is in accordance with Fitch's guidelines related to the review of Rating Watch status following Fitch's placement of the company's rating on Rating Watch Negative on Oct. 1, 2014.

Fitch believes eBay's operating profile could support the 'A-' rating, given solid secular growth prospects and strong profit margins and free cash flow (FCF). However, the Negative Watch reflects the potential for more aggressive financial policies after the separation, given the lack of strategic rationale for strong investment grade ratings.

Fitch believes eBay would have meaningfully greater financial flexibility at a mid- to high-'BBB' for increased shareholder returns and to make larger acquisitions amidst current operating challenges and intensifying competition.

Pro forma for the separation, eBay will consist of the Marketplace and Enterprise segments, although the company is exploring a potential sale or initial public offering (IPO) of Enterprise. As a result, Fitch estimates operating EBITDA will decline by roughly \$1.5 billion to \$3.5 billion and eBay currently plans to retain all \$7.6 billion of existing debt.

As a result, Fitch estimates total leverage (total debt to operating EBITDA) will increase to 2.2x from 1.5x for 2014. With expectations for continued pressure from activist shareholders for robust stock buybacks and faster FCF growth outside the U.S., Fitch believes it unlikely eBay will commit to returning and maintaining total leverage at or below 2x.

eBay plans to capitalize both businesses for investment grade ratings, including a \$2 billion net cash position at eBay and \$5 billion net cash position at PayPal. Fitch expects to resolve the Negative Watch or provide expected ratings upon confirmation of eBay's financial policies, ultimate capital structure and liquidity profile.

KEY RATING DRIVERS

Strengths include:
--Leading e-commerce platform with strong brand recognition and technology;
--Significant number of active accounts provides substantial customer diversification;
--High profitability and low capital intensity resulting in strong and consistent FCF generation;
--Solid secular growth from increasing e-commerce penetration, particularly in international markets with comparatively lower e-commerce penetration and rapid mobile adoption.

Concerns include:
--Expectations for more aggressive post-separation financial policies, which could be exacerbated by the company's significant offshore cash balances and FCF generation.
--Potential dis-synergies or shift in economics between Marketplaces and PayPal post-spin. A material increase in PayPal's take rate could adversely affect eBay's profitability since PayPal currently represents 80% of the transactions conducted on eBay. eBay intends to put in place arm's-length, long-term operating agreements to minimize dis-synergies post spin;
--Challenges gaining e-commerce platform traction in fastest growing international markets;
--Challenges accelerating new customer additions following Google's search engine optimization (SEO) changes and the cyber-attack-driven password reset in 2014.

RATINGS SENSITIVITIES

Negative rating actions could occur if Fitch expects:

--eBay's post-separation total leverage will remain above 2x, consistent with more aggressive financial policies;
--Normalized FCF to total adjusted debt will approach the 10% level, from a combination of higher debt levels and sustained operating weakness in Marketplaces.

Fitch believes positive rating actions are unlikely, given continued activist shareholder pressures and in the absence of management's commitment to debt reduction and a more conservative capital structure.

As of Dec. 31, 2014, Fitch believes eBay's liquidity was strong and supported by:

--\$6.3 billion of cash and equivalents;
--\$8.3 billion of non-restricted and non-equity short- and long-term investments;
--An undrawn \$3 billion RCF expiring Nov. 22, 2016 that fully supports the \$2 billion commercial paper (CP) program, under which there were no borrowings as of Dec. 31, 2014;
--Annual FCF of roughly \$4 billion.

Of the \$14.6 billion of cash and cash equivalents and short- and long-term non-restricted and non-equity investments, \$10.1 billion was located outside the U.S. and would be subject to tax liabilities if repatriated.

Total debt was \$7.6 billion and consisted of;

--\$600 million 1.625% notes due October 2015;
--\$250 million 0.7% notes due July 2015;
--\$1 billion 1.35% notes due July 2017;
--\$450 million Floating Rate notes due July 2017;
--\$400 million Floating Rate notes due January 2019;
--\$1.1 billion 2.2% notes due August 2019;
--\$500 million 3.25% notes due October 2020;
--\$750 million 2.875% notes due August 2021;
--\$1 billion 2.6% notes due July 2022;
--\$750 million 3.45% notes due August 2024; and
--\$750 million of 4.0% notes due July 2042.

KEY ASSUMPTIONS

--Low single digit FX-neutral revenue growth for Marketplaces in the near-term, driven by weak first performance as the company rebuilds its new user base resulting in the resumption of revenue growth in the second half.
--Mid-teen FX-neutral Payments revenue growth from increased ubiquity and transaction payment value (TPV) growth.
--Mid-single digit FX-neutral revenue growth for Enterprise, driven by increasing e-commerce penetration.
--Profitability will be constrained by increased investments driving new users in Marketplaces and increased ubiquity in Payments, despite the company's recently announced headcount reductions.
--Fitch uses available cash and domestic FCF to exhaust the \$3 billion outstanding share repurchase program in 2015.
--Fitch's rating case assumes 2015 debt maturities are refinanced.

Fitch maintains the following ratings on Rating Watch Negative:

--Long-term IDR 'A-';
--Senior unsecured revolving credit facility 'A-';
--Senior unsecured notes 'A-';

Fitch affirms the following ratings:

--Short-term IDR at 'F2';
--\$2 billion CP program at 'F2'.