CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Arrow Electronics, Inc. (Arrow), including the long-term Issuer Default Rating (IDR) at 'BBB-'. The rating actions affect $3.3 billion of debt including the mostly undrawn $1.5 billion revolving credit facility (RCF). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATINGS DRIVERS
The ratings and Outlook reflect:
--Arrow's leading market positions in both segments of its business, Global Components and Global ECS. Arrow's growing scale and breadth continues to increase its importance and value in the global supply chain.
-- Arrow's reasonably conservative capital allocation policies with expectations for total adjusted leverage (total debt adjusted for rent expense to total operating EBITDAR) to remain below 3.5x, versus a Fitch estimated 2.5x for the latest 12 months ended Sept. 27, 2014. Further, Fitch expects consistently positive free cash flow (FCF) through the cycle, aided in part by the countercyclical nature of inventory.
--The relatively low profit margins and high capital intensity of the distributor model, as well as the inherent cyclicality in the markets it serves. The company's inorganic growth strategy is also a potential source of event risk for bondholders, since larger acquisitions would also carry integration risk that is amplified/intensified by low profit margins.
--Fitch's expectations for mid-cycle revenue growth in the low- to mid-single digits over the intermediate term, driven by distributor consolidation in Asia and increased demand from growing electronic content. For 2015, Fitch expects 3%-4% organic revenue growth due to strong components demand from Asian manufacturers that is more than offset lower market share in Asia for integrated enterprise products.
--Fitch's expectation for mid-cycle operating EBITDA margins in the 4% to 5% range. Fitch estimated operating EBITDA margin was 4.7% for the LTM ending Sept. 27, 2014, due to positive sales growth. In a downturn, Fitch expects operating EBITDA margin could approach 3%, as was the case in 2009.
--Fitch's expectations for up to $500 million of annual FCF through the cycle. In a downturn, cash from the liquidation of inventory should offset lower operating EBITDA to support FCF.
--Fitch's expectations Arrow will use FCF for organic growth, small bolt-on acquisitions, and share repurchases. Arrow has roughly $121 million in remaining share repurchase authorization and has repurchased $240 million in shares over the LTM period. The ratings incorporate Fitch's expectations Arrow would moderate share repurchases in the face of pressured FCF.
--Fitch expects larger acquisitions likely would be debt-financed, resulting in higher than expected leverage. Such a scenario could pressure ratings if Fitch did not expect Arrow to return leverage to historical levels in the short run.
At the same time, Fitch believes Arrow's diversification into software, network security, cloud-based services and reverse logistics could strengthen Arrow's credit profile over the long term. Demand for these products and services should be less volatile than the traditional hardware and components businesses.
Fitch estimates interest coverage (EBITDA to total interest expense) was 9.3x for the LTM ended Sept. 27, 2014 and will remain near 10x over the intermediate term.
Credit strengths include the company's:
--Leading market positions and critical function serving small- and medium-sized customers in both component and enterprise computing distribution worldwide;
--The ability to generate cash from operations in a normal revenue growth environment, as well as achieve solid free cash flow in a downturn from reduced inventory;
--Highly diversified supplier and customer base.
Credit concerns include Arrow's:
--Thin operating margins, which are typical of the IT distribution market;
--Significant investment levels required to increase share in the faster-growing Asia-Pacific region, including potentially debt-financed acquisitions and the attendant integration risks;
--Arrow's exposure to the cyclical demand patterns and cash flows associated with the semiconductor and networking sectors.
RATINGS SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Expectations that adjusted leverage will be sustained above 3.5x due to debt-financed acquisitions and/or share repurchases.
--Significant revenue declines and margin compression due to the SMB end-market shifting its technology spending away from distributers toward large cloud providers that have the size to buy directly from ODMs.
Positive: Upside movement in the ratings is limited given Arrow's thin operating margin profile with significant cyclical demand exposure. Significant sustained improvement in credit metrics paired with a long-term strategic business rationale and demonstrated commitment from management to maintain a higher rating would be necessary.
As of Sept. 27, 2014, liquidity was solid with $258 million in cash of which $221 million was held outside the U.S. and $1.45 billion available from a $1.5 billion senior unsecured RCF which expires in December 2018. Fitch's expectations for annual FCF up to $500 million through the cycle also support liquidity. Arrow has roughly $640 million available under a $900 million accounts receivable securitization (ARS) facility maturing in March 2017.
Total debt as of Sept. 27, 2014 was $2.2 billion and consisted of:
--$50 million drawn on the company's $1.5 billion revolving credit facility expiring December 2018;
--$360 million drawn on the company's $900 million A/R securitization facility expiring March 2017;
--$250 million of 3.375% notes due 2015;
--$200 million 6.875% senior debentures due 2018;
--$300 million 3.0% notes due 2018;
--$300 million 6% notes due 2020;
--$250 million of 5.125% notes due 2021;
--$300 million 4.5% notes due 2023; and
--$200 million 7.5% senior debentures due 2027.
Fitch has affirmed the following ratings for Arrow:
--Issuer Default Rating (IDR) at 'BBB-';
--$1.5 billion senior unsecured RCF at 'BBB-';
--Senior unsecured debt at 'BBB-'.
The rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology'(May 28, 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=941575
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