AutoZone is prepping a corporate bond offering

By Ciara Linnane

Car parts retailer is executing a stock buyback program that's partly debt-funded

AutoZone Inc. is planning a bond offering later Tuesday, according to a regulatory filing, with the proceeds earmarked for general corporate purposes.

BofA Securities, JP Morgan, U.S. Bancorp. and Wells Fargo are joint book-running managers on the deal. It will be split between a three-year and 10-year tranche, Bloomberg reported, citing people familiar with the matter.

As the following chart from BondCliQ Media Solutions shows, the company's most active bonds have enjoyed net buying in the last 10 days for near-term maturities and its 10-year notes. The company's 4.75% notes that mature in 2033 have seen $105 million of net buying over the period.

Fitch Ratings assigned a BBB rating to the offering to reflect the company's leading position in auto parts retail, steady growth in sales and EBITDA (earnings before interest, taxes, depreciation and amortization) over time, high profit margins and steady credit metrics.

"AutoZone's (AZO) operating trajectory is supported by generally benign competition from direct peers and the industry's resilience to discount and e-commerce competition due to inventory investment requirements, a heavy service component and purchase immediacy requirements," Fitch wrote in a note.

But debt balances are expected to grow over time as the company executes a partly debt-funded stock buyback program. In June, the company said its board had added $2 billion to its stock buyback authorization, which had $843.6 million left in it at the end of its fiscal third quarter.

As the chart below shows, AutoZone has $12.8 billion in outstanding debt with $1.8 billion due to mature in 2025.

AutoZone's credit metrics are stable, according to Fitch. Its EBITDAR -- leverage fell below 2.5 times in fiscal 2021 to 2022, but pre-pandemic, it was closer to 2.7 times.

Fitch is expecting the company to generate free cash flow of about $2 billion a year starting this year.

"Excess free cash flow, together with some incremental borrowings, is expected to be directed toward share buybacks. Overall debt levels are expected to grow in line with EBITDAR, enabling the company to maintain its current leverage profile longer-term," said the agency.

AutoZone's stock, meanwhile, has gained 2% in 2023 to date, while the S&P 500 has gained 18%.

Other corporate bond news: Ford moves closer to investment grade after Moody's upgrade, as its bonds see net buying

-Ciara Linnane

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07-18-23 1308ET

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