DBRS Assigns Rating of A (high), Stable Trend, to Costco’s New Debt Issuance

DBRS Limited (DBRS) has today assigned a rating of A (high) with a Stable trend to Costco Wholesale Corporation’s (Costco or the Company) planned debt issuance as announced on May 9, 2017. The issuance is expected to settle on May 18, 2017.

The issuance is made up of the following four tranches (collectively, the Notes):
-- $1.0 billion principal amount of 2.15% notes due May 18, 2021;
-- $800.0 million principal amount of 2.30% notes due May 18, 2022;
-- $1.0 billion principal amount of 2.75% notes due May 18, 2024; and
-- $1.0 billion principal amount of 3.00% notes due May 18, 2027.

DBRS notes that the Notes will be unsecured and will rank equally with Costco’s outstanding unsecured and unsubordinated indebtedness.

Costco intends to use the net proceeds from the offering and existing cash to pay a special cash dividend of approximately $3.1 billion ($7.00 per share), payable on May 26, 2017, and to repay at or prior to maturity all of its 1.125% Senior Notes due December 15, 2017, in an aggregate principal amount of $1.1 billion with associated prepayment costs.

For the last 12 months ended February 12, 2017, Costco’s lease-adjusted debt-to-EBITDAR was 1.2 times (x). DBRS notes that on March 15, 2017, the Company repaid the $1.1 billion of 5.5% Senior Notes due March 2017, with existing cash and cash equivalents and short-term investments. Pro forma the $3.8 billion Notes issuance announced on May 9, 2017, DBRS estimates Costco’s leverage to be approximately 1.7x. However, DBRS notes that accounting for the repayment of the $1.1 billion 1.125% Senior Notes due December 15, 2017, DBRS estimates Costco’s leverage will be approximately 1.5x, which DBRS views as appropriate for the Company’s A (high) rating. DBRS notes that Costco’s coverage ratios remain strong for the current rating category and, in addition, credit metrics should benefit from growth in operating income going forward. However, should Costco’s operating performance deteriorate materially, or the Company pursue further material debt-funded shareholder returns, such that lease-adjusted debt-to-EBITDAR rises toward 2.0x for an extended period, the ratings could be pressured.

DBRS notes that the ratings continue to be supported by the Company’s large size, efficient operations, strong market position and the benefits associated with its warehouse membership business model. The ratings also consider intense competition in the retail industry, risks associated with geographic expansion and the potential for less conservative financial management.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Merchandising Industry, which can be found on our website under Methodologies.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.