New York, August 04, 2022 — Moody’s Investors Service (“Moody’s”) assigned Meta Platforms, Inc.’s (“Meta”) inaugural bond issuance A1 senior unsecured ratings. We expect the issuance to be of benchmark size with various maturities. Meta, the parent company, will be the issuer and the bonds will have no guarantees. The outlook is stable.
Assignments:
..Issuer: Meta Platforms, Inc.
….Senior Unsecured Regular Bond/Debenture, Assigned A1
RATINGS RATIONALE
The A1 debt rating assignment is based on Meta’s strong credit profile which reflects the leading global position of its platform brands in social networking, supported by its extensive user base of 2.88 billion and 3.65 billion family daily active people (DAP) and family monthly active people (MAP) worldwide, respectively. The company’s vast unparalleled global base of users, compelling user experience, and its unique and efficient ability to finely target pools of consumers on a mass basis make the company’s platforms highly attractive for global brand, national, regional and local advertisers. Moody’s believes that the company will continue to be an innovative leader by developing and applying artificial intelligence and refined data analytics to improving ad performance and platform engagement. The company is investing heavily to move beyond 2D screens toward immersive experiences like augmented and virtual reality to help build the next evolution in social technology.
Meta’s credit profile incorporates its strong mobile reach, highly desirable demographic profile and engaging apps, which contribute to its pivotal position in the extremely competitive and growing digital advertising market. Meta is supported by its very strong financial profile and financial flexibility, including over $119 billion in revenues and over $54 billion in EBITDA (with Moody’s adjustments) for the twelve months ended 3/31/22. It has robust profit margins and free cash flow generation, notwithstanding the current cyclical economic challenge for advertising. Moody’s expects the company’s annual free cash flow will be down in fiscal 2022 to around $15 billion due to the current heavy investment cycle. When this investment period ends, we believe it will return to recent historical free cash flow levels of between $25 and $40 billion per annum. While the company currently has no reported debt outstanding, the rating assumes that Moody’s adjusted gross leverage will be sustained over time between 0.5x and 1.0x including Moody’s adjustments, though it may increase beyond that level temporarily to fund acquisitions and quickly retreat back to under 1.0x. Moody’s believes that management is willing to take business risks as it invests to expand and engage its user base, but that management does not wish to take material financial or market risk at the same time. Therefore, the company has embraced conservative financial policies, including disciplined acquisition/investment financing strategies, which provide incremental support to the rating.
The A1 rating considers the inherent risks that internet businesses face due to potential decline in traffic and subscriber interest, competitive threats, and of course legal and regulatory risks. In Moody’s view, the two largest among these risks facing Meta’s platforms today stem from increasing competition from platforms like TikTok, and from significant legal and regulatory pressures. Specifically, data privacy concerns, platform manipulation by malicious actors, and most importantly global and local bipartisan regulatory pressure and investigations. The most concerning risks are antitrust lawsuits, regulatory actions or legislation that lead to any changes to the company business model or material fines. Regulatory risk has always been a cloud over the company’s future but it has become more prominent in recent years. As that risk has risen materially, and until there is greater certainty around the company’s sustained business model and practices, it will pose a drag on upward credit improvement. The increased regulatory risk is evidenced by the antitrust lawsuit against the company by the FTC and 46 US states. The company also faces many other related legal challenges as well as those tied to privacy issues. Of increasing concern is the broad and bipartisan shift in tone from US regulators and lawmakers regarding Big Tech/Media. Investigations launched by the Justice Department (DOJ) and the House Judiciary Committee are looking into Big Media/Tech more broadly. Certain market participants have expressed concerns over safe harbors as it relates to issues like censorship over certain viewpoints, content related to hate speech, and disinformation. Currently there are a number of legislative proposals trying to reduce safe harbor protection, which could negatively affect the company. While there are no US federal government fines for civil monopolization violations, Moody’s most important fundamental concern is whether regulation or actions imposed on the company materially and permanently alter its business model such that its leading positions, business diversity and profitability are significantly constrained or reduced.
Privacy regulation has taken center stage for companies more recently. Apple’s changes to its IOS mobile phone software made it easier for users to block platforms from collecting data. This poses a large challenge for maintaining ad relevancy, and as a result, significant AI investment is targeting making ads more relevant while using less data. The EU implemented a regulation which addresses the export of personal data outside the EU and European Economic Area (EEA) areas which is an ongoing challenge for Meta. At home, the California Consumer Privacy Act went into effect in 2020, protecting consumer privacy rights for residents of California. Though increasing regulation is a threat to existing and advancing data gathering business models, it also widens Meta’s competitive moat as some newer competitors will find navigating the regulatory waters to be challenging and costly.
While Moody’s believes the company is well-positioned within its credit rating, has strong financial flexibility and a strong management team to overcome any potential near-term business challenges, its limited history of performing through varied market conditions and potential regulatory upheaval, as well as our expectation that the company will become debt-cash neutral over the medium-term limits credit improvement for at least the near term.
The stable outlook reflects our view that Meta will continue to maintain or grow its platforms, innovate to expand user engagement, defend its leading market position, protect its loyal customer base and diversify its revenues by continuing to invest aggressively in new features and tools. The outlook also assumes that on average, adjusted gross leverage will be sustained between 0.5x and 1.0x including Moody’s adjustments and the company will generate strong free cash flows, sustain significant liquidity relative to debt and move towards becoming debt-cash neutral over the medium-term.
Meta’s liquidity profile is extremely strong. We expect management will continue to maintain very strong liquidity based on: management’s conservative financial philosophy; its emphasis on maintaining significant financial after-tax cash balances to ensure its ability to quickly address competitive and market challenges and take advantage of opportunities to invest; and its significant free cash flow generation. The company’s liquidity consists of around $40 billion in cash and marketable securities, and its free cash flow which Moody’s expects to range from around $15 billion to $40 billion per year for the medium term depending upon investment cycles. Moody’s anticipates that the company will use excess cash beyond around $40 billion to repurchase shares. The company does not have a revolving credit facility and does not issue commercial paper.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward rating pressure could occur if the company continues to adhere to very conservative financial policies, the company demonstrates the ability to sustain stable if not growing revenue and profitability amid intensifying competition, and regulatory and legal risks moderate. Factors that could lead to a downgrade include gross adjusted debt-to-EBTIDA sustained above 1.0x, free cash flow to debt sustained below 30%; and cash (including short-term investments) to debt sustained below 1.0x. Secular challenges, including changes in the competitive landscape that lead to a material sustained decline in family daily and monthly active people and revenues, and/or regulatory pressures that force a change in business model could also put downward pressure on the rating.
Social and Governance are key considerations for the rating assignment. Meta’s ESG Credit Impact Score is Neutral-to-Low (CIS-2). There is no credit impact to date, but the potential risk from social risk factors, specifically legal and regulatory risks, over time exist and will likely remain over the medium-term but are largely mitigated by the company’s ability to withstand such challenges with its extremely conservative financial policies and significant financial capacity and liquidity. The nature of its media and other activities result in limited exposure to physical climate risk and it has achieved a carbon neutral footprint, resulting in low environmental risk. Its Environmental Issuer Profile Score is therefore Neutral-to-Low (E-2), in line with exposures of the media industry. Meta’s social risk is moderately negative (S-3) as the company faces high risks related to multiple antitrust lawsuits and regulatory investigations, and moderate risks from potential legislative changes to third-party content liability protection and potential changes to data privacy law changes that could negatively impact its business model. These risks are moderated by positive demographic and societal trends as consumers continue to increase their consumption of online content which supports the company’s leading position as a provider of social media, targeted display and video advertising. The company’s exposure to governance considerations is neutral to low (G-2). It has conservative financial policies and risk management and a very successful track record. Together these factors along with ultra-strong credit metrics and liquidity mitigate risk related to the founders’ key man risk and effective control of the board of directors, which is otherwise considered independent and has a mostly independent nominating committee.
Meta Platforms, Inc, with its headquarters in Menlo Park, California, is a social networking internet based desktop and mobile platform that helps people and businesses connect and share information, photographs, and videos and play games. The company’s products include Facebook, Messenger, Instagram, WhatsApp and Meta Quest. Meta is moving beyond 2D screens toward immersive experiences like augmented and virtual reality to help build the next evolution in social technology. Revenues and EBITDA (incorporating Moody’s standard adjustments) for twelve months ended 3/31/22 were about $120 billion and $54 billion respectively.
The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com
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Neil Begley
Senior Vice President
Corporate Finance Group
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Lenny J. Ajzenman
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