Fitch Affirms Anixter's IDR at 'BB+'; Rates Term Loan 'BB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) for Anixter International, Inc. (Anixter) and its wholly owned operating subsidiary, Anixter Inc. at 'BB+'.

Fitch also rates Anixter's senior unsecured term loan at 'BB+'. The Rating Outlook is Stable. A full list of current ratings follows at the end of this release.

The ratings affect $1.3 billion of total debt, including the revolving credit facility (RCF).

Anixter reached a definitive agreement to acquire Tri-Ed, an independent distributor of security and low-voltage technology products, for $420 million. Anixter will fund the purchase price with debt, including: i) $220 million of borrowings under the existing RCF and ii) a $200 million senior unsecured term loan.

Tri-Ed will complement Anixter's security business positions, specifically in video, access control, intrusion detection and fire/life safety markets. In the trailing 12 months ended June 30, 2014, Tri-Ed reported sales of $570 million and operating EBITDA margin of 6.3%, roughly equivalent to Anixter's margin. The deal is expected to close near the end of the third quarter of 2014, subject to customary regulatory approval and closing conditions.

KEY RATINGS DRIVERS

The ratings and Outlook reflect Fitch's expectations for low- to mid-single-digit organic revenue growth in 2014 as Anixter benefits from modest macroeconomic improvements and new project wins across its three business segments. Fitch expects EBITDA margin to largely hold steady above 6%, absent any significant swings in the U.S. dollar and copper prices.

In a stress scenario, Fitch would expect EBITDA margin to decline to levels near the trough of the last downturn, around 5%. Fitch would expect working capital cash inflows to roughly offset lower EBITDA levels and for free cash flow (FCF) to be above $200 million. In a flat revenue environment, Fitch estimates Anixter would generate more than $200 million of annual FCF.

Fitch expects that Anixter will continue to utilize excess cash and FCF for potential acquisitions and shareholder-friendly actions rather than debt reduction. Share repurchases and special dividends in excess of FCF in the face of mounting macroeconomic concerns could pressure Anixter's rating, particularly if such action is likely to result in higher leverage upon the resumption of revenue growth.

Pro forma for the incremental debt and acquisition, Fitch estimates leverage (total debt / total operating EBITDA) will increase to 2.8x from 2.2x as of the latest 12 months (LTM) ended July 4, 2014. Over the longer term, Fitch anticipates leverage will range from 2x-3x.

Anixter's ratings and Outlook are supported by the following factors:

--Leading market position in niche distribution markets, which Fitch believes contributes to Anixter's above-average industry margins;

--Broad diversification of products, suppliers, customers and geographies which adds stability to the company's financial profile by reducing operating volatility;

--Working capital efficiency which allows the company to generate FCF in a downturn.

Credit concerns include:

--Historical use of debt and FCF for acquisitions and shareholder-friendly actions;

--Thin operating margin characteristic of the distribution industry, albeit slightly expanded given the company's niche market position;

--Significant unhedged exposure to copper prices and currency prices;

--Exposure to the cyclicality of IT demand and general global economic conditions.

RATINGS SENSITIVITIES

Future developments that may, individually or collectively, lead to negative rating action include:

--Revenue declines that signal a loss of market share, either to other distributors or suppliers increasingly going direct to market;

--Sustained negative FCF from significant special dividends or severe operating margin compression, likely resulting in structurally higher debt levels.

Fitch believes positive rating actions are limited by Anixter's history of shareholder-friendly actions.

Pro forma for the term loan and acquisition, Fitch believes Anixter's liquidity was adequate and consisted of the following as of July 4, 2014:

--$121 million of cash and cash equivalents;

--$106 million available under a $400 million RCF expiring 2018;

--$100 million available under a $300 million on-balance-sheet accounts receivable securitization program expiring May 2017.

Pro forma for the term loan and acquisition, total debt as of July 4, 2014 was $1.2 billion and consisted primarily of the following:

--$294 million outstanding under bank revolving credit lines;

--$200 million outstanding under the accounts receivable securitization program;

--$200 million of term loan A;

--$200 million of 5.95% senior unsecured notes due February 2015;

--$350 million of 5.625% senior unsecured notes due May 2019;

--$4 million of other debt.

Fitch has affirmed the following ratings:

Anixter International, Inc.

-- IDR at 'BB+';

Anixter Inc.

--IDR at 'BB+';

--Senior unsecured notes at 'BB+';

--Senior unsecured bank credit facility at 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 4, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=849874

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1 312-368-3210
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
John M. Witt, CFA
Senior Director
+1 212-908-0673
or
Committee Chairperson
Sean Sexton
Managing Director
+1 312-368-3130
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Jason Pompeii
Senior Director
+1 312-368-3210
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
John M. Witt, CFA
Senior Director
+1 212-908-0673
or
Committee Chairperson
Sean Sexton
Managing Director
+1 312-368-3130
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com