Costco Cos. Sr Unsecd Debt Raised to 'A-' by S&P NY.NEW YORK--(BUSINESS WIRE)--Aug. 27, 1997--Standard & Poor's CreditWire 8/27/97--Standard & Poor's today raised its senior unsecured debt Unsecured debt Debt that does not identify specific assets that the debtholder is entitled to in case of default. rating of Costco Companies, Inc. to single-'A'-minus from triple-'B'-plus and its shelf debt rating of senior unsecured securities to preliminary single-'A'-minus from preliminary triple-'B'-plus. In addition, Standard & Poor's assigned its triple-'B'-plus rating to Costco Companies' $750 million zero coupon convertible subordinated notes due 2017, privately placed under Rule 144A Rule 144A A Securities & Exchange Commission rule modifying a two-year holding period requirement on privately placed securities to permit qualified institutional buyers to trade these positions among themselves. with registration rights. The company's single-'A'-minus corporate credit and 'A-2' commercial paper ratings were affirmed af·firm v. af·firmed, af·firm·ing, af·firms v.tr. 1. To declare positively or firmly; maintain to be true. 2. To support or uphold the validity of; confirm. v.intr. . The single-'A'-minus corporate credit and triple-'B'-plus subordinated debt Subordinated Debt A loan (or security) that ranks below other loans (or securities) with regard to claims on assets or earnings. Also known as "junior security" or "subordinated loan". ratings of Costco Wholesale Corp. were withdrawn. The senior unsecured notes issued by Costco Companies had been rated one notch below the corporate credit rating because of structural subordination. However, Costco recently redeemed (with proceeds from the new zero coupon debt) the remaining debt issued by its subsidiary, Costco Wholesale Corp., and also expects to eliminate the operating company operating company A business that engages in transactions with outsiders. guarantees on the bank debt and commercial paper program. The ratings reflect a strong business position and solid financial results, offset by an aggressive growth strategy in a highly competitive industry. Costco operates about 200 wholesale clubs in the U.S. and 75 internationally. The membership warehouse business is a low margin, high volume concept, which has produced good profitability and cash flow. Over the last two years, return on capital averaged 15% and funds from operations Funds From Operations (FFO) Used by real estate and other investment trusts to define the cash flow from trust operations; earnings with depreciation and amortization added back. covered 25% of total debt. Operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. (after working capital needs) aggregated $705 million for fiscal 1995 and 1996 and financed 68% of capital spending capital spending Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years. , reflecting the high $15 million per unit cost of constructing a new club. Capital spending is expected to remain heavy at around $550 million in order to build about 20 clubs annually, net of closings. Financial policy is moderating from a previously aggressive stance, when capital spending was well beyond internally generated operating cash flow, and the company decided to spin off assets to Price Enterprises in January 1995. Financial leverage was between 44%-50% from 1994 to 1996, but total debt has declined to less than 40% of capitalization capitalization n. 1) the act of counting anticipated earnings and expenses as capital assets (property, equipment, fixtures) for accounting purposes. 2) the amount of anticipated net earnings which hypothetically can be used for conversion into capital assets. due to the redemption of about $160 million of debt and conversion of $300 million of debt to equity since 1996's fiscal year end. OUTLOOK: STABLE The ratings incorporate expectations of continued improvement in operating and financial measures due to better buying and distribution, comparable sales increases, further penetration of ancillary businesses, higher margins, and the recent conversion of debt to equity. The potential for further ratings upgrades is limited by the thin margins typical of this industry and the competitive nature of the business. --- CreditWire CONTACT: Gerald A Hirschberg, 212/208-1625 Janis C Richards, 212/208-1756 For more information on criteria or subscriptions: http://www.ratings.standardpoor.com |
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