After maintaining a debt-free balance sheet for almost 4 years, finally MasterCard Inc. (MA) raised debt from the markets through senior notes worth $1.5 billion, as publicized by a regulatory filing. This will go down as the first bond sale ever executed by the company.
Accordingly, MasterCard issued senior unsecured notes worth $1.5 billion in two tranches, one of which comprises 5-year notes worth $500 million and bears interest of 2% and a spread of 40 basis points (bps) over the US Treasuries. The remaining $1.0 billion notes will be issued for 10 years, carrying interest of 3.375% and a spread of 72 bps over a similar benchmark.
Both set of notes have been assigned an “A2” rating by Moody’s Investor Service of Moody’s Corp. (MCO), with a stable outlook. MasterCard projects to utilize the proceeds from the sale of notes for boosting operating leverage and shareholder return.
Assured of Disciplined Debt Management
A review of the last decade reflects that after holding long-term debt of about $230 million from 2004—2006, MasterCard had kept reducing its long-term debt to about $149.8 million in 2007 to about $20 million in 2008—2009 to a zilch since 2010.
Moreover, the company enjoys a durable competitive advantage in the peer group, which reveals that MasterCard has been financially sturdy enough to initiate portfolio expansions both organically and through acquisitions all these years. Increased financial flexibility attained by the latest bond sale, and at historically low rate of interests, will further lower cost of capital and augment MasterCard’s long-term growth prospects, going forward.
Moody’s is confident of MasterCard sustaining its double-digit top-line growth and core operating margins of over 45%. Moreover, given strong annual free cash flow generation of over $3.5 billion, the company can favourably operate with this debt and still maintain a long-term adjusted debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) of 1.0x going ahead.
Additionally, the recent favourable ruling on the Federal Reserve's debit rules and practices in the US instils confidence in MasterCard, implying that the company has control over its future course of action with regard to the ruling. Moody’s also expects MasterCard to manage the ongoing merchant litigation related to interchange fees in a way that secures its conventional financial profile. We believe the company is poised to consistently showcase significant growth with its well-diversified operating model and prudent financial management in the future as well.
While both MasterCard and Moody’s carry a Zacks Rank #3 (Hold), some better-ranked stocks in the financial sector include Global Payments Inc. (GPN) and Discover Financial Services (DFS). Both these stocks bear a Zacks Rank #2 (Buy).
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