TEXT-S&P affirms WESCO International

Thu Oct 18, 2012 5:13pm EDT

Overview
     -- U.S.-based industrial distributor WESCO International Inc. (WESCO) has 
announced an agreement to acquire Canada-based EECOL Electric for 
approximately CAD$1.14 billion. We expect that the company will finance the 
transaction with debt. 
     -- We are affirming our ratings on WESCO, including the 'BB-' corporate 
credit rating. 
     -- The positive outlook reflects our expectation that the increase in 
financial leverage resulting from this acquisition and previously announced 
smaller transactions will be temporary, and that credit measures will return 
to levels that could support a higher rating within the next 12 months.

Rating Action
On Oct. 18, 2012, Standard & Poor's Ratings Services affirmed its ratings on 
Pittsburgh, Pa.-based WESCO International Inc., including the 'BB-' corporate 
credit rating. The outlook remains positive.

Rationale
The rating affirmation reflects our view that the company's leverage will, 
upon completion of the acquisition of EECOL Electric (not rated), increase to 
about 4x pro forma from about 2.5x debt to EBITDA currently, which would 
remain consistent with our expectations for the 'BB-' rating. The outlook 
remains positive, reflecting our expectations that debt reduction from free 
cash flow should lead to leverage falling below 3.5x in the next 12 months. We 
consider the financial risk profile as "aggressive." We view the acquisition 
as positive for WESCO's business risk profile, which we continue to consider 
"satisfactory." 

WESCO is one of the top five electrical distributors in the U.S. and serves 
customers across the construction, industrial, governmental, and utility 
infrastructure markets. The acquisition of EECOL will strengthen WESCO's 
presence in Canada and further diversify its presence in Latin America. EECOL 
operating margins are also somewhat higher than WESCO's, reflecting lower 
exposure to competitive bidding conditions for construction projects, and a 
higher proportion of revenues derived from maintenance, repair, and 
operations. This should support overall profitability. 

Electrical distribution markets both in the U.S. and Canada remain highly 
fragmented. Although this can lead to intense pricing pressure in a downturn, 
it also enables leading players like WESCO to grow at faster rate than the 
underlying market. It also allows WESCO to use its scale to obtain global 
accounts with major industrial manufacturers and to leverage its cost 
structure.

Improving demand in WESCO's industrial and construction markets have 
contributed to solid revenue and profit growth in the past two years, but 
growth rates have softened in the third quarter of 2012. We expect low- to 
mid-single-digit revenue expansion next year, reflecting mixed conditions 
across key markets, and believe EBITDA margins could flatten around 7.5% pro 
forma for EECOL and other recent acquisitions.

We view WESCO's financial risk profile as aggressive. We estimate that total 
debt to EBITDA pro forma for the acquisition will be about 4x, and funds from 
operations (FFO) to total debt will be about 17%. These measures are 
consistent with our expectations for the rating, and we expect they will 
improve in the next 12 months. Because WESCO's business model is highly 
working capital intensive, we expect working capital requirements to moderate 
along with the softer rate of revenue organic growth that we expect in 2013. 
This should enable WESCO to generate free operating cash flow of potentially 
more than $250 million in 2013. Assuming some continued but more measured 
acquisition activity, we expect credit measures could improve to less than 
3.5x debt to EBITDA and toward 20% FFO to total debt over the next 12 months. 
If WESCO achieves and sustains these measures, these ratios could be 
consistent with a higher rating.

Liquidity
We believe WESCO will have adequate sources of liquidity to cover its needs in 
the near term. Although the company has not yet communicated the sizes and 
terms of the new term loan agreement and upsized revolving facilities that it 
expects to enter into, we expect liquidity will remain adequate. Our 
assessment of WESCO's liquidity profile incorporates the following 
expectations and assumptions:
     -- We expect the company's sources of liquidity, including cash and 
credit facilities availability, to exceed its uses by 1.2x or more over the 
next 12-18 months.
     -- We expect net sources to remain positive, even if EBITDA declines more 
than 15%.
     -- The company's compliance with financial covenants could survive a 15% 
drop in EBITDA, in our view.

Liquidity sources include free cash flow, which we expect could be about $250 
million in 2013, and availability under its credit facilities. We expect that 
the company will retain more than $250 million of combined availability under 
its upsized receivable securitization facility and revolving credit facility. 
The revolving facility currently includes a springing fixed-charge covenant of 
1x, to be tested if availability under the facility falls below 10% (that is, 
$40 million).

Recovery analysis
We expect to update our recovery analysis after WESCO communicates details of 
its financing plans for the EECOL acquisition. We do not expect any changes to 
the 'B' issue-level ratings and '6' recovery ratings on WESCO's unsecured and 
subordinated debt. For the most recent recovery analysis, see the recovery 
report published Oct. 31, 2011, on RatingsDirect.

Outlook
The outlook is positive. Although we expect financial leverage to be about 4x 
pro forma at the closing of the EECOL acquisition, we believe cash flow 
generation applied to debt reduction could lead to leverage falling below 3.5x 
within 12 months. This is based on our assumption for low- to mid-single-digit 
revenue growth, steady margins, and about $150 million of debt reduction in 
2013.

We could raise the rating if WESCO does prioritize debt reduction next year, 
remains disciplined in its acquisition strategy and shareholder returns 
initiatives, and if we believe that leverage will likely remain less than 3.5x 
and FFO to debt coverage greater than 20%, taking into account the cyclicality 
of the company's end markets.

We could revise the outlook to stable if the company's ratios remain around 4x 
debt to EBITDA and 15% FFO to total debt for a sustained period. This could be 
a result of more aggressive growth initiatives, such as acquisition spending 
that delays the debt reduction that we expect, or because of weaker industrial 
activity or operational shortfalls that cause revenues to decline by more than 
5% and erode EBITDA margins by more than 100 basis points.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008


Ratings List
Ratings Affirmed

WESCO International Inc.
WESCO Distribution Inc.
 Corporate Credit Rating                BB-/Positive/--    

WESCO International Inc.
 Senior Unsecured                       B                  
  Recovery Rating                       6                  

WESCO Distribution Inc.
 Subordinated                           B                  
  Recovery Rating                       6
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