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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Fitch RatingsPrimary AnalystWilliam DicksonAssociate
Director+1-212-908-0808Fitch Ratings33 Whitehall StNew York, NY
10002orSecondary AnalystJason PompeiiSenior
Director+1-312-368-3210orCommittee ChairpersonDavid PetersonSenior
Director+1 312-368-3177orMedia Relations:Alyssa Castelli, +1
212-908-0540alyssa.castelli@fitchratings.com