Wal-Mart Stores Inc. is winning the lowest borrowing costs thisyear as its AA credit rating offsets challenges ranging from acorruption probe to reports of thinly stocked shelves.

The world's largest retailer, which has $5 billion of debtmaturing through October, yesterday sold an equal amount of bondsin a four-part offering that included the lowest coupon onthree-year notes in 2013, according to data compiled by Bloomberg.Wal-Mart's sale adds to a supply of AA-rated debt that has declinedto 11 percent of the $4 trillion U.S. corporate market from 18percent three years ago.

Wal-Mart, whose annual free cash flow exceeds the market valuesof about half the companies in the Standard & Poor's 500 stockindex, is succeeding in the bond market even after forecastingquarterly same-store sales won't improve from a year earlier. TheBentonville, Arkansas-based retailer is also contending with afederal investigation into whether it systematically bribed Mexicanofficials and customer complaints of deteriorating service.

“The stable free cash flow is the major driver,” JamesGoldstein, an analyst at CreditSights Inc. in New York, said in atelephone interview. “I don't think people are too concerned aboutthe headlines.”

Wal-Mart sold $1 billion of 0.6 percent notes due April 2016that yield 30 basis points more than similar-maturity Treasuries.That's the narrowest spread for similar-maturity corporate debtthis year, eclipsing the 35 basis-point gap awarded toGlaxoSmithKline Plc, PepsiCo Inc. and Praxair Inc., Bloomberg datashow.

The deal also included $1.25 billion of 1.125 percent debtmaturing in April 2018, $1.75 billion of 2.55 percent, 10-year debtand $1 billion of 30-year securities that pay a 4 percent coupon tomatch the 2013 low previously recorded by Medtronic Inc. andAnheuser-Busch InBev NV.

“Wal-Mart remains committed to maintaining a strong balancesheet, which combined with our solid free cash flow and AA creditrating helped us secure favorable coupons,” said Randy Hargrove, acompany spokesman.

Each of Wal-Mart's coupons are lower than the average forsimilar-maturity debt ranked AA, at least seven levels abovespeculative grade, as of April 3, according to prices compiled byBloomberg. Wal-Mart is rated Aa2 by Moody's Investors Service andan equivalent AA by Standard & Poor's.

Interest Cost

The company's weighted average coupon of 2.09 percent onyesterday's transaction is about half the 4.02 percent paid on its$3.69 billion of dollar-denominated debt maturing this year,Bloomberg data show.

“They're going to slash their interest expense with this issue,”said Nikhill Patel, an analyst at San Antonio-based FrostInvestment Advisors LLC, which oversees $9 billion. “Investors aredrawn to the strong free cash flow and operating margins thatWal-Mart generates.”

Wal-Mart's $12.7 billion of free cash in the 12 months endedJan. 31 is more than eight times the funds generated by CostcoWholesale Corp., the largest U.S. warehouse club. An operatingmargin of 5.93 percent exceeds every U.S. food and staples retailerwith market values bigger than $5 billion except Whole Foods MarketInc., Bloomberg data show.

Before yesterday's sale, Wal-Mart's debt underperformedsimilarly rated bonds this year. A price decline of 1.82 percentfor the company's notes compares with a 0.7 percent drop in AArated securities, according to Bank of America Merrill Lynch indexdata.

The company is facing obstacles. A decline in the retailer'sU.S. workforce even as it opens new stores has coincided withcustomer frustration that there aren't enough employees to keepshelves stocked, cash registers manned and shoppers' questionsanswered. Staffing at Wal-Mart and Sam's Club outlets in the U.S.has declined by about 120,000 employees since 2008 to 1.3 million,according to regulatory filings. In the same period, the number ofstores grew to 4,005 from 3,550, the documents show.

That's benefited companies such as Target Corp., which has anoperating margin of 7.11 percent, as customers seekalternatives.

'Execute Superbly'

Wal-Mart's in-stock shelf availability is at historically highlevels and averages between 90 percent and 95 percent, Hargrovesaid.

Same-store sales for Wal-Mart's U.S. locations in the 13 weeksending April 26 will be little changed from a year earlier, BillSimon, chief executive officer of Wal-Mart U.S., said on a Feb. 21teleconference to discuss fourth-quarter results with analysts andinvestors.

The company, which spent $157 million in the year ended Jan. 31linked to its investigations of possible bribery in itsinternational operations, said last month that it expects tocontinue incurring costs related to the probes. The U.S. Departmentof Justice and the Securities and Exchange Commission, as well asfederal and local government agencies in Mexico, are also examiningbribery allegations.

While Wal-Mart doesn't expect those matters to have a materialadverse effect on its business, the company said it can'treasonably estimate the potential loss.

“Most of the issues people raise are issues that a shareholdermight care about but not a bondholder,” said Carol Levenson,director of research at Chicago-based Gimme Credit LLC, which ratesWal-Mart's debt “stable.” “This is perhaps the strongest, steadiestretailing credit out there. They know what they're doing andgenerally they execute superbly.”

Bloomberg

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