Student Name(s):
Krystian Raymond
Borrower / Obligor:
Walmart
Amount of Loan($):
$500 million
Exporter:
Sum of Current Financial Debt :
Walmart
Country of Risk:
Peru
$121,367m
S&P Rating for Country:
BBB+ (Stable Outlook)
Financial information in USD ($) unless otherwise noted.
Customer Description and Purpose of Financing (what is the customer trying to achieve?):
Walmart is the largest retailer in the world, the biggest private employer and the second largest public corporation globally. Headquartered in
Bentonville, Arkansas, Walmart has been in operation since 1969 and has been publicly traded since 1972. It is still over 50% owned by the Walton
family. Walmart currently has 11,098 retail units in 27 countries, under 69 different banners. In 2013, Walmart’s international operations comprised
almost 30 percent of the company’s net sales, with an increase of 7.4 percent from the prior year to $135.2 billion. Walmart International serves more
than 105 million customers per week.
Though growth has been relatively strong over the past 5 years (4.5% average), 2010 saw net sales grow by only 1.1%, compared to 7.3% in 2009.
Walmart cited economic conditions and price deflation as the causes. 2010 also saw a $9.8 billion unfavorable currency exchange rate impact in the
Walmart International segment, compared to a $2.3 billion unfavorable currency exchange rate impact in 2009. Walmart’s commitment to growth
(global expansion, customer traffic, sales), leverage (lowering operating expenses relative to sales), and returns (increasing shareholder value,
dividends) has provided solid financial direction through the recession and continuing into the recovering economy. Net sales have increased 16%
over 5 years.
The request is to secure a term loan of $500 million to be repaid over 10 years compounded annually at 4%. Principal and interest payments are to
be made annually. This loan would be used to acquire retail units within Peru, namely the Plaza Vea chain of hyper-markets. Plaza Vea locations are
found mostly within Lima, the largest city and consumer market in the country. There are 56 current locations under the Plaza Vea banner. The Plaza
Vea chain outlets were acquired by Intercorp Retail in 2003.Intercorp had a net income of approximately $51m in FYE 2012, compared to
approximately $21m in FYE 2011. Gross margins were 27.6% in FYE 2012, increasing from 27.4% in FYE 2011. The Plaza Vea retail outlets present
Walmart with the best organizational fit within the Peruvian retail market, as the locations are well-known and provide shoppers with the ‘one-stop
shop’ retail capability. Walmart does not currently have a retail presence in Peru, though it has exhibited expansion success in neighboring countries
Brazil and Chile.
DEAL INFORMATION (to be completed by UW, in collaboration with workcell as required)
d
Structure:
Direct Loan
Pricing:
Market Window
If Other please specify:
Consensus
Consensus-plus
ERD
ASU
Key Risks / Issues > Description:
Peru’s retail markets remain under-developed in non-metropolitan areas. Chain retail outlets hold only 15% of
retail market within Peru, compared to an average of 60% control in Brazil and Chile. The variation in socioeconomic status across non-metropolitan areas creates difficulty for branding and pricing across chain outlets.
This limits Walmart’s ability to grow following acquisition of the mainly metropolitan Plaza Vea outlets.
1) Commercial Risk
A risk analysis rating of A has been given. As the 2nd largest supermarket chain in Peru, Walmart can gain a
strong foothold in the Peruvian market quickly. The lowered ability for growth in terms of outlet expansion can be
offset by Walmart’s corporate focus on increasing store sales and lowering operational expenses as a
percentage of sales. Retail sales in Peru are set to grow 20% within the year, allowing Walmart to pursue their
strategy of driving growth through same-store sales increases. Walmart’s untapped credit facility (over
$16,000m) creates confidence in their ability to effectively manage debt loads and unfavourable financial
conditions.
2)
3)
WORK CELL RECOMMENDATION
Focus of Analysis > Basis of Recommended Flight Path:
Recommended Dark Green flight path given (1)Walmart has shown strong ability to manage and service debt loads (2) Undrawn credit facilities and
high interest coverage ratio further exhibit company strength (3) Strong corporate policy focuses on 3 areas: growth, leverage, returns. This has
given Walmart consistent growth in the face of price deflation and economic downturn. (4) continually strong business performance as evidenced by
FYE 2013 annual report and historical performance
Recommended Flight Path:
Dark Green
Light Green
Yellow
Red
DETAILED RISK ANALYSIS
1
1) COUNTERPARTY ANALYSIS
FINANCIAL ANALYSIS
Profitability
In FY 2013, Walmart saw net sales increase to $466 billion, an increase of 5% over FY 2012. In addition, Walmart saw historical lows in terms of
operating expenses, dropping to 19.1% (as a percentage of sales). This increases profitability and allows for financial growth in existing retail units.
$13 billion was returned to shareholders through dividends and stock repurchases.
Operating income increased 22.1% over 5 years to $27,801m in FYE 2013. This demonstrates Walmart’s strong efficiency and effectiveness in the
retail market.
Return On Assets was calculated at 9.0% in FYE 2013, exhibiting stable returns. Return On Investment was calculated at 18.2% in FYE 2013,
exhibiting a slight decrease from 18.6% in FYE 2012. These ratios show Walmart to be a profitable company, exhibiting strong and stable growth
opportunity. Gross profit margins have remained very stable, averaging 24.6% over the past 3 years. Walmart’s ability to stay consistent through
price deflations and economic downturns show the strength of the company and prove its ability to produce strong growth in both store sales
increases as well as global expansions.
Liquidity / Debt Service
Though current and quick ratios are low, at 0.88 and 0.22, respectively, Walmart has shown strong ability to service its debt load. Quick ratio
remains low due to high inventory level necessary in large retail operations. Debt/Equity ratio of 1.48 is well below industry average (2.7) and has
dropped steadily over the past 5 years.
Walmart has over $16,000m in undrawn credit facility. The strength of Walmart’s operating income and consistent profitability have significant
positive effects on lowering debt levels and reliance on credit facility.
Interest Coverage ratio remains very strong in FYE 2013, at 13.45. This exhibits Walmart’s strong ability to service its debts and demonstrates a
strong ability to service the requested loan amount of $500m. The interest coverage ratio remains well-above industry average and has shown
steady increases over the 3 previous fiscal years. Additional debt can be serviced without any material negative impacts to Walmart’s operational
ability or profitability.
Debt has increased at an average of 5.3% per year, where assets are growing at an average rate of 6.0% per year. Revenues have increased at an
average of 4.5% per year (3-year high of 6.0% in FYE 2012).
Capital Structure
Walmart’s Capital Structure includes:

364-day revolving credit facility of $10,000m ($10,000m undrawn)

Five-year credit facility of $6,258m ($6,258m undrawn)

Stand-by letters of credit of $1,871m ($3m undrawn)

Long Term Debt of $38,394m (as per FYE 2013 financial statements), down from $44,070m in FYE 2012

Total Debt of $43,981m in FYE 2013 consisting of mostly unsecured debt (USD/Euro/Sterling/Yen denominated) with maturities ranging from 2014
to 2042

$32,976m in Total USD denominated debt

$5,000m in debt issuances from April 18, 2011 (maturities ranging from April 15, 2014 to April 15, 2041)
Company Case
USD Millions
Historical
Company Case
01/31/2011
01/31/2012
01/31/2013
01/31/2014
01/31/2015
01/31/2016
Actual
Actual
Actual
Projected
Projected
Projected
421,849
446,950
469,849
490,992
513,087
536,175
3.4%
6.0%
5.0%
4.5%
4.5%
4.5%
314,946
335,127
352,488
372,580
393,817
416,264
Gross Profit Margin
24.8%
24.5%
24.4%
24.6%
24.6%
24.6%
Operating Income (EBIT)
25,542
26,558
27,801
29,010
30,272
31,589
Net Income
16,993
16,387
17,756
18,644
19,576
20,555
Statement Date
Income Statement
Total Revenues
Growth
Cost of Sales
Balance Sheet
2
Cash and Equivalents
7,395
6,550
7,781
8,061
8,351
8,651
Total Assets
180,663
193,406
203,105
215,291
228,208
241,900
Total Liabilities
109,416
117,645
121,367
127,799
134,573
141,705
Current Liabilities
58,484
62,300
71,818
79,502
88,009
97,426
Equity
71,247
75,761
81,738
87,460
93,582
100,133
TNW
54,484
55,110
61,241
64,915
68,810
72,939
CFO
23,643
24,255
25,591
26,615
27,679
28,786
CAPEX
12,193
16,609
12,611
13,368
14,170
15,019
Free Cash Flow
10,944
10,745
12,693
13,962
15,359
16,894
1.21
1.46
1.59
1.81
2.06
2.36
4,47
4.52
5.04
5.36
5.70
6.05
500
5.000
--
--
--
--
Total Debt / EBITDA
4.28
4.43
4.36
4.40
4.44
4.49
Debt / Equity
1.53
1.55
1.48
1.46
1.44
1.41
Debt/TNW
2.00
2.14
1.98
1.97
1.95
1.94
EBITDA / Int. Exp.
12.75
12.30
13.45
13.62
13.77
13.92
Current Ratio
0.88
0.88
0.83
0.86
0.86
0.86
Quick Ratio
0.26
0.23
0.22
0.24
0.24
0.24
Cash Flow Analysis
Dividends per common
share (in dollars)
Diluted net income per
common share attributable
to Walmart (in dollars)
New Debt Issuance
Leverage & Debt Service
Liquidity
PROJECTIONS
Fiscal 2012 projections
Profitability
Based on the financial information, revenues are projected to rise by 14.1% over 3 years based on an average growth rate of 4.5% annually. Return
On Investment (ROI) was calculated at 18.6% in FYE 2012, compared to 18.2% in FYE 2013. ROI was projected at 17.8% in FYE 2016. Return On
Assets (ROA) was calculated at 9.0% in FYE 2013, and was projected at 8.5% in FYE 2016.
From FY 2009 through FY 2013, Walmart has returned over $60 billion to shareholders through dividends and share repurchases. Earnings per
share increased 59% over this time period.
Walmart’s focus on its leverage policies has led to steady reductions in operating expenses. As a percentage of sales, expenses have dropped from
19.7% in FY 2010 to 19.1% in FY 2013. This has given Walmart the ability to grow its profitability internally, while domestic and international
expansion opportunities allow for growth externally. Due to the nature of the Peruvian market, Walmart must focus its strategies on same-store
sales increases and operating expense reductions to support growth within the market.
Liquidity/Debt Service:
Walmart remains fairly non-liquid, with projections of a current ratio of 0.86 and a quick ratio of 0.24. The low quick ratio is due to the inventory
necessities in the retail outlet sector. Liquidity ratios have remained lower than average, but stable over the previous 3 years. Interest coverage ratio
is expected to rise by 3.5% over 3 years, projected at 13.92 in 2016. This exhibits Walmart’s strong ability to service the loan. The requested loan
will not have a material negative effect on Walmart’s ability to service debt. Debt/Equity is low, calculated at 1.48 in FYE 2013 and projected at 1.41
in FYE 2016, compared to industry average of 2.7. This exhibits Walmart’s ability to successfully manage its debt loads. Successful management of
debt is further evidenced by its undrawn credit facilities.
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2) OTHER TRANSACTION RISKS
No other major transaction risks exist for Walmart at this time.
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COVENANTS
Minimum current ratio of 0.75 tested on a quarterly basis
Maximum Total Debt/Equity less than or equal to 1.85 tested on a quarterly basis
Debt/Tangible Net Worth not to exceed 2.5 tested on a quarterly basis
Gross Profit Margin above 20%
CAPEX not to exceed $19,000m over next 5 years
REPAYMENT
 Term loan over 10 year period (interest compounded quarterly, principal and interest payments annually)
PROPOSED CHANGES TO THE CREDIT AGREEMENT
The following key changes to the existing credit agreement have been proposed in the amending agreement::
1. Facility: Term loan of $500m permitted
2. Facility: Interest at 4% quarterly, principal and interest paid in annual installments
3. Facility: Maturity date will be10 years following sign off and no later than December 15, 2023.
4. Covenants: Maximum Total Debt/Equity less than or equal to 1.85 tested on a quarterly basis
5. Covenants: Minimum current ratio of 0.75 tested on a quarterly basis
4