Fitch Rates Avnet's Sr. Unsecured Note Offering 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings, Chicago, 18 March 2016: Fitch Ratings has assigned a 'BBB-' rating to Avnet, Inc.'s (Avnet) offering of $300 million five-year senior unsecured notes. The Rating Outlook is Stable.

Proceeds from the offering are expected to be used to refinance $215 million of debt assumed from the Premier Farnell acquisition and the remainder to be used to repay borrowings under the revolver, term loan or accounts receivable securitization program. The new notes will rank pari passu with other senior unsecured indebtedness of Avnet, and will contain an obligation to repurchase the notes at 101% upon change of control, consistent with the existing notes. The notes are subject to an interest rate step-up provision requiring adjustments to the coupon rate if the notes are downgraded below investment grade and will be subject to further adjustment upon subsequent negative rating actions. The coupon adjustments are defined by schedule within the indenture. This step up provision is not included in Avnet's legacy senior unsecured notes.

KEY RATING DRIVERS

--Fitch expects proceeds from the pending sale of Avnet's Technology Solutions (TS) business to Tech Data Corporation will be used to reduce debt and lower leverage below Fitch's 3.0x gross leverage (unadjusted debt to EBITDA) in the near term. A deviation from Fitch's expectation for the company to reduce leverage below 3.0x would likely result in a downgrade. Following debt reduction, Fitch expects Avnet's capital allocation priorities will focus on M&A and shareholder returns.

--Fitch believes the divestiture of the TS business is a positive given the business' negative revenue growth, lower margins and few synergies with the Electronics Marketing (EM) segment, but is offset by the remaining business having less scale and diversification and more cyclicality of demand. The TS business has had negative revenue growth four of the last five years as technology consumers reduce on premise spending and shift to hyper-converged infrastructure and cloud environments. Fitch estimates the remaining company will have approximately 80% exposure to the broader semiconductor market and will be susceptible to the cyclicality of the industry.

--Avnet's strong market position in the EM segment. Avnet's scale and breadth continues to increase its importance and value in the global supply chain.

--Fitch's expectations for $150 million to $300 million of annual free cash flow (FCF) through the forecast. In a downturn, cash from the liquidation of inventory should offset lower operating EBITDA to support FCF. Fitch's expects Avnet will use FCF for organic growth, small bolt-on acquisitions, and shareholder returns. The ratings incorporate Fitch's expectations that Avnet would moderate share repurchases in the face of pressured FCF.

--Fitch expects Avnet's conservative approach to managing its balance sheet and capital allocation will continue following the close of the transactions and anticipates the company's total adjusted leverage (total debt adjusted for rent expense to total operating EBITDAR) will remain below 3.5x, versus a Fitch estimated 3.2x for the latest 12 months ended Oct. 1, 2016.

--The ratings reflect the key operating characteristics of the distributor model, namely relatively low profit margins and high capital intensity as a percentage of EBITDA, as well as the inherent cyclicality and significant swings in working capital investment. Fitch expects Avnet's EBITDA margins will range from 4% to 5% over the intermediate term versus 4.1% for the latest 12 months (LTM) ending Oct. 1, 2016. In a downturn, Fitch expects operating EBITDA margin could approach 3.5%, as was the case in 2009.

--Fitch believes 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 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 Avnet to return leverage to historical levels in the short-run.

--Fitch expects mid-cycle revenue growth in the low-single digits over the intermediate term, driven by increased demand for electronics content.

--Avnet's quarterly dividend plan implemented in 2013 does not impact the ratings but does reduce financial flexibility. This could pressure the investment grade rating in a stressed environment, particularly if share repurchase activity exceeds FCF generation before changes in working capital.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Avnet include:

--Fitch expects organic revenue growth in the low single-digits;

--EBITDA margin expansion from the divestiture of the lower margin TS business and synergies;

--Fitch expects $80 million of synergies from the TS divestiture;

--Small- to medium-sized acquisitions over the rating horizon to build out the digital platform;

--Fitch expects $1 billion to $1.5 billion of debt repayment over the near-term after the divestiture is completed.

--Quarterly dividend payments and excess cash flow used to repurchase stock.

RATING SENSITIVITIES

Negative: Fitch's expectation for adjusted leverage (adjusted debt to EBITDAR) to be sustained above 3.5x or gross leverage (unadjusted debt to EBITDA) to be sustained above 3.0x, most likely due to domestic cash limitations or debt financed acquisitions, or the expectation for mid-cycle FCF to adjusted debt below 5%.

Positive: Upside movement in the ratings is limited given Avnet's thin operating margin profile with significant cyclical demand exposure. 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.

LIQUIDITY

Avnet's liquidity is solid and supported by cash of approximately $1.2 billion ($1.15 billion offshore) as of Oct. 1, 2016 and $400 million available under the company's $1.25 billion senior unsecured revolving credit facility, expiring July 2019. Additionally, Fitch expects mid-cycle FCF of $150 million to $300 million through the forecast.

FULL LIST OF RATING ACTIONS

Fitch currently rates Avnet, Inc. as follows:

--Long-Term Issuer Default Rating (IDR) at 'BBB-';

--Senior unsecured debt at 'BBB-'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Sept. 21, 2016

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--No material adjustments have been made that have not been disclosed in public filings of this issuer.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015601

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings
Primary Analyst
Zack Schroeder, +1-312-368-2056
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
or
Committee Chairperson
David Peterson, +1-312-368-3177
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Zack Schroeder, +1-312-368-2056
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
or
Committee Chairperson
David Peterson, +1-312-368-3177
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com