Rating Action: Moody's assigns first-time Ba1 ratings to MercadoLibre; stable outlook
Global Credit Research - 04 Jan 2021
New York, January 04, 2021 -- Moody's Investors Service, ("Moody's") assigned a Ba1 Corporate Family Rating (CFR) to MercadoLibre, Inc. (MercadoLibre) and a Ba1 rating to MercadoLibre´s proposed senior unsecured notes with maturity of five to 10 years and a principal amount of around $1 billion. Net proceeds from the notes will be used to refinance existing debt and for general corporate purposes, including green projects and/or eligible social projects. The outlook is stable.
The rating of the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and assume that these agreements are legally valid, binding and enforceable.
This is the first time that Moody's assigns ratings to MercadoLibre.
- Corporate Family Rating: Ba1
- Proposed Senior Unsecured Notes: Ba1
- The outlook for the ratings assigned is stable
The Ba1 ratings assigned to MercadoLibre reflect its position as the largest online marketplace in Latin America, along with its recognized brand and experienced and well-seasoned management team. The ratings also incorporate its broad presence across the region and broad range of services provided to both vendors and consumers, which are key factors to the company's business model and generate synergies through its integrated platforms (website, marketplace, financial services, shipping services, advertisement services, among others) that favor user base retention and growth. Also embedded in the rating is MercadoLibre's robust liquidity profile and adequate corporate governance standards, with a diversified ownership structure and listed on Nasdaq since 2007.
MercadoLibre´s rating is constrained by its weak profitability relative to industry peers, mainly derived from heavy consumer services and shipping expenses resulting from the company's aggressive growth strategy since 2017. Still, we expect the company to benefit from the future growth of digital payments and online sales, with significant improvements in credit and profitability metrics in 2020 and 2021. Also constraining the rating are potential event risks that could jeopardize logistic operations or limit access to the securitization market necessary to fund the company's fintech business. MercadoLibre's exposure to foreign exchange risk also constrains the rating because revenues are denominated in the region's local currencies while indebtedness is mainly denominated in US dollars.
We expect MercadoLibre´s top line growth to support an improvement in the company's profitability and deleveraging process. Accordingly, the company is well positioned to take advantage of the growing e-commerce and Fintech businesses in Latin America, particularly because the coronavirus pandemic has accelerated the switch to on-line sales from traditional brick and mortar sales and because online sales are still underpenetrated in Latin America. In recent years, MercadoLibre has showed a strong track record of sales growth but at the expense of profitability as the expansion strategy incorporated a material increase in subsidized shipping and marketing expenses; although profitability showed material improvement in 2020, it remains low relative to industry peers.
Revenues increased to $3.3 billion for the last twelve months ended in September 2020 (LTM Sep-20) from $2.3 billion in 2019, and were 3.5 times higher than in 2015. During 2018-2019 higher marketing and logistics costs, on top of free-shipping campaigns and discounts to mobile points of sales (mPOS), drove down Moody's adjusted EBITDA to $63 million in 2019 and $30 million in 2018, from around $200-240 in the 2015-2017 period. But EBITDA has recovered significantly during 2020, reaching $322 million as of LTM Sep-20, driven by both higher Gross Merchandise Volume (GMV) of $18 billion from $14 billion in 2019 and higher Total Payment Volume (TPV), on and off the market place, at $42.4 billion from $28 billion in 2019. We expect EBITDA margin to remain around 8.0-9.0% in 2020-2021, up from an average of 2.4% in 2018-2019, aided by growing GMV and TPV and a reduction in marketing expenses, supporting EBITDA levels at around $400 million. We also believe there is upward potential to this scenario if MercadoLibre´s is able to capture growing e-commerce sales in Latin America without a deterioration in profit margins.
The company has a strong liquidity profile and a track-record of prudency towards liquidity. As of September 30, 2020, the company had $3.8 billion in cash and short -term investments, of which $484 million was restricted cash. MercadoLibre´s $3.3 billion in available cash and short-term investment compares favorably to the company's short-term debt maturities of $618 million. The company is required to hold liquid positions to face cash withdrawals of vendors and customers that have holdings in MercadoPago, which as of September 2020 amounted to $1.4 billion. We expect MercadoLibre to maintain a cash balance greater than its debt maturities and to continue generating positive retained cash flow as the company manages profitability and limits dividend payments.
The proposed notes issuance will reinforce the company's liquidity, while also providing additional funding to its fintech business and environmental and social projects. At the same time, positive and growing EBITDA margins will allow MercadoLibre to continue its deleveraging process. We expect Moody's adjusted debt to EBITDA ratio to remain at around 5.0x in the next 12-18 months, down from 16.1x as of fiscal year 2019. However, the company is exposed to exchange rate swings in the region, particularly in Brazil, Argentina and Mexico, where it generates the bulk of revenues, which may hinder the company's ability to deleverage in the future. This risk is somewhat mitigated by the company's cost structure mainly denominated in the local currencies and by the company's large holdings of cash and marketable securities in US dollars.
MercadoLibre's Ba1 ratings are one notch above Brazil's government bond rating of Ba2, which is granted only on an exceptional basis. The company has solid liquidity and broad presence and competitive position in other countries in the region, which allows financial flexibility to sustain economic downturns.
The stable outlook incorporates our expectation that MercadoLibre will be able to maintain EBITDA margins at healthy levels, which in turn will aid the company's deleveraging process and support its cash generation ability. The outlook also incorporates our expectation that the company will maintain its robust liquidity profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A positive rating action would require strong liquidity and a continued improvement in EBITA margins on a sustained basis. Quantitatively, a positive rating action would require (all Moody's adjusted metrics) debt to EBITDA ratio to remain below 3.0x (4.5x LTM Sep-20) and EBITA to interest expense ratio to remain above 6.0x (1.8x LTM Sep-20); also, retained cash flow (RCF) to net debt ratio should remain above 25% or a net cash position (MercadoLibre had a net cash position as of September 30, 2020).
MercadoLibre's rating could be downgraded if it fails to maintain strong liquidity and/or profit margins deteriorate to an extent that lead to a weakening of credit metrics. Quantitatively, a downgrade would require (all Moody's adjusted metrics) debt to EBITDA ratio to remain above 5.0x and EBITA/interest expense below 1.5x. Negative pressure on the rating could also emerge if logistic operations and/or access to the securitization market necessary to fund the company's fintech business is considerably restricted in any way.
A downgrade of Brazil's (Ba2 stable) sovereign rating would also likely lead to a rating downgrade for MercadoLibre.
The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
MercadoLibre, Inc. was founded in 1999 and has become one of the largest online ecommerce ecosystems in Latin America, with operation in 18 countries and 320 million confirmed registered users as of 2019. MercadoLibre accounted for 18% of the region's e-commerce net sales in 2019. MercadoLibre´s operations combine the company's e-commerce operations and its fintech platform, Mercado Pago, with each segment accounting for around half of net revenue.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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