CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Arrow Electronics' senior notes offering. Pro forma for the issuance, Fitch's ratings affect $4 billion of debt including the 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.
Arrow will use $700 million of senior notes to repay $250 million of senior notes due Nov. 1, 2015 and for other general corporate purposes which may include acquisitions or further debt reduction.
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 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 2.7x pro forma for the new senior notes and repayment of the 2015 notes.
--Low profit margins and high capital intensity of the distributor model, as well as inherent end market cyclicality. 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 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 electronics content. For 2015, Fitch expects 3%-4% organic revenue growth due to strong components demand from Asian manufacturers. This is partly offset by lower integrated enterprise demand.
--Fitch's expectation for mid-cycle operating EBITDA margins ranging from 4% to 5%. Fitch estimates operating EBITDA margin was 4.7% for the LTM ending Dec. 31, 2014. 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 free cash flow (FCF) through the cycle. In a downturn, cash from the liquidation of inventory should offset lower operating EBITDA and support FCF.
--Fitch's expectations Arrow will use FCF for small bolt-on acquisitions, and share repurchases. Arrow has $261 million in remaining share repurchase authorization. The ratings incorporate Fitch's expectations Arrow would moderate share repurchases in the face of pressured FCF.
--Fitch expects larger acquisitions would be at least partially debt-financed, potentially resulting in higher than expected leverage in the short term. Fitch would expect that leverage would return to historical levels over the longer term.
Fitch expects interest coverage (EBITDA-to-total interest expense) will remain near 10x over the intermediate term versus 9.3x for the LTM ended Dec. 31, 2014.
Credit strengths include the company's:
--Leading market positions and critical function, distributing components to small- and medium-sized customers worldwide;
--FCF through the cycle driven by higher profitability in a growth environment and the ability to generate solid FCF 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 cyclical demand patterns associated with the semiconductor sector.
Fitch's key assumptions within the rating case for the issuer include:
--Management will manage debt levels resulting in total adjusted leverage remaining below 3.5x;
--Expectation for mid-cycle operating EBITDA margins ranging from 4%-5%;
--Revenue growth in the low- to mid-single digits over the intermediate-term;
--FCF is used principally for share repurchases and bolt-on acquisitions;
--Arrow would moderate share repurchases in the face of pressured FCF.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Expectations 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.
Positive: Upside movement in the ratings is limited given Arrow's thin operating margin profile and demand cyclicality. There would need to be a significant and sustained improvement in credit metrics and commitment from management to maintain more conservative financial policies.
Pro forma liquidity, including $700 million of new notes and the expected $250 repayment of the 3.375% notes, is solid with $850 million in cash of which $301 million was held outside the United States as of Dec. 31, 2014. There is $1.5 billion available from an undrawn senior unsecured revolving credit facility which expires in December 2018. Fitch expects liquidity support from up to $500 million of annual FCF through the cycle. Arrow has roughly $625 million available under $900 million accounts receivable securitization (ARS) facility maturing in March 2017.
Total debt is approximately $2.8 billion and consists of:
--$275 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;
--$350 million of Sr. notes due 2022;
--$300 million 4.5% notes due 2023;
--$350 million of Sr. notes due 2025;
--$200 million 7.5% senior debentures due 2027.
Fitch currently rates Arrow as follows:
--Issuer Default Rating (IDR) 'BBB-';
--$1.5 billion senior unsecured revolving credit facility '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