Fitch Rates Anixter's Senior Unsecured Notes Offering 'BB+/RR4'

CHICAGO--()--Fitch Ratings has assigned a 'BB+/RR4' rating to Anixter, Inc.'s senior unsecured notes offering. Anixter intends to use the net proceeds of the offering to fund a portion of the previously announced acquisition of HD Supply's Power Solutions business for $825 million in cash. The ratings affect $1.7 billion of debt, including undrawn amounts under the company's credit facilities. A full list of current ratings follows at the end of this release.

KEY RATING DRIVERS

Fitch believes Anixter's proposed acquisition of Power Systems, the leading top utilities distributor in the U.S., should support longer-term top line growth by adding complementary transmission and distribution capabilities to Anixter's existing generation business.

Power Systems significantly expands Anixter's high and low voltage product offerings, as well as value added services, for utilities markets and should drive longer-term revenue synergies and share gains as customers consolidate vendors.

Power Systems will add roughly $1.9 billion of annual revenues growing in the mid-single digits, although Fitch anticipates significant exposure to project spending may increase revenue volatility. Pro forma for the transaction, Fitch estimates operating EBITDA margin of 6.1% and expects margins in the 5.5% to 6% range through the intermediate-term, given lower profitability associated with utilities markets.

Fitch expects Anixter will fund the acquisition with a mix of available cash and incremental borrowings. As a result, Fitch believes total leverage (total debt to operating EBITDA) could approach 3.7x, versus 2.6x for the latest 12 months (LTM) ended July 28, 2015. However, the ratings and Outlook incorporate Fitch's expectations Anixter will manage debt levels with free cash flow (FCF) to return total leverage closer to 3x in the near-term.

Fitch believes Anixter's liquidity remains adequate and Fitch forecasts $50 - $75 million of incremental FCF by the acquisition's expected closing date (fourth quarter of 2015).

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

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

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

--Counter-cyclical inventory that allows the company to generate free cash flow in a downturn.

Credit concerns include:

--Expectations that credit protection measures could remain weak from the use of FCF for shareholder returns rather than debt reduction;

--Thin operating margins characteristic of the distribution industry, which amplifies movement in credit protection measures through the IT cycle;

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

KEY ASSUMPTIONS

--Pro forma for the transaction, sale of the fasteners business and Triad acquisition in the 4th quarter of 2014, Fitch expects low- to mid-single digit organic revenue growth through the intermediate-term that will be meaningfully constrained by FX headwinds in 2015. Anixter's FX exposure is less post-sale of the fasteners business given the higher exposure to Europe.

--Revenue synergies and share consolidation support longer-term revenue growth at the higher end of the low- to mid-single digit range.

--Acquisition activity will remain muted with Anixter focusing on integration of Power Supply, as well as continued integration of Triad and rationalization post-sale of the fasteners business.

--Operating EBITDA margin ranging from 5.5% to 6% through the intermediate-term, supported by higher revenues and increasing mix of value added services, despite lower base line profitability for utilities markets.

--Lower blended capital and working capital intensity supports more consistent, albeit modest FCF through the cycle.

--Anixter will use FCF for debt reduction rather than shareholder returns over the near-term, returning total leverage to 3x.

RATING SENSITIVITIES

Negative rating actions could occur if Fitch expects Anixter to sustain adjusted leverage (Total Debt plus 8x annual rent expense to EBITDAR) above 4x likely from a combination of:

--Market share losses or profit margin contraction; or

--Use of FCF for special dividends or other shareholder returns instead of debt reduction.

Fitch believes positive rating actions are limited in the absence of management's commitment to more conservative financial policies, including a meaningfully lower adjusted leverage target and more moderate and predictable shareholder returns.

LIQUIDITY

Anixter's liquidity was adequate at July 28, 2015 and was supported by:

--$206.2 million of cash; and

--$458.7 million of available borrowing capacity under Anixter's credit facilities and accounts receivables securitization facility as of July 28, 2015.

Modest annual FCF of $100 million to $200 million also supports liquidity.

Total debt pro forma for the senior notes issuance was $1.3 billion and consisted primarily of the following:

--$196 million unsecured term loan A due November 2018;

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

--$400 million 5.125% senior unsecured notes due October 2021;

--$350 million senior unsecured notes due 2023.

Fitch currently rates Anixter as follows:

Anixter International, Inc.

--Issuer Default Rating (IDR) 'BB+';

Anixter Inc.

--IDR 'BB+';

--Senior unsecured notes 'BB+/RR4';

--Senior unsecured bank credit facility 'BB+/RR4'.

The Rating Outlook is Stable.

Date of relevant committee: July 14, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

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

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988993

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
William Dickson
Associate Director
+1-212-908-0808
Fitch Ratings
33 Whitehall St
New York, NY 10002
or
Secondary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
or
Committee Chairperson
David Peterson
Senior Director
+1 312-368-3177
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
William Dickson
Associate Director
+1-212-908-0808
Fitch Ratings
33 Whitehall St
New York, NY 10002
or
Secondary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
or
Committee Chairperson
David Peterson
Senior Director
+1 312-368-3177
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com