TEXT - Fitch affirms Anixter International ratings
Dec 10 - Fitch Ratings has affirmed Anixter International Inc.'s (Anixter) and its wholly owned operating subsidiary, Anixter Inc.'s ratings as follows: Anixter --Issuer Default Rating (IDR) at 'BB+'; --Senior unsecured debt at 'BB-'. Anixter Inc. --IDR at 'BB+'; --Senior unsecured notes at 'BB+'; --Senior unsecured bank credit facility at 'BB+'. The Rating Outlook is Stable. Fitch's stable outlook for IT distributors in 2013 reflects the companies' strong liquidity and countercyclical cash flows, which help offset Fitch's expectations for a difficult competitive environment and softening end market demand. Fitch's base scenario is for flat to modestly negative revenue change in 2013, although risk is weighted to the downside with the potential for a cyclical decline pending global economic conditions. Fitch views a reasonable stress scenario for the distributors at this point in time as consisting of a double digit decline in 2013 continuing through part of 2014. Under both scenarios, Fitch would expect significant margin compression but for EBITDA margins to remain positive across the sector. FCF generation would likely be significantly positive, given the expected resulting decline in working-capital balances under such a scenario. Fitch believes Anixter would maintain its 'BB+' rating under such a scenario. This assumes cash generated from working-capital declines does not go to shareholders or aggressive acquisitions that would ultimately result in higher leverage once growth returns and working capital would be expected to increase. Fitch would be concerned if revenues declined from a loss of market share, either to other distributors or suppliers increasingly going direct to market. The ratings and Outlook incorporate the above considerations as well as the following: --Fitch expects low single digit organic revenue growth in fiscal 2013 as growth in emerging markets and Anixter's wire and cable segment offsets macroeconomic softness. Fitch believes EBITDA margins (currently 6.6% for the LTM ending Sept. 28, 2012) may be pressured given difficulties in sustaining profitability in Europe and softening end market-demand in North America. --In a stress scenario, Fitch would expect EBITDA margins to decline to levels near the trough of the last downturn, roughly 5%, or moderately lower if revenue declines are more severe or copper prices approach 2009 levels of roughly $2/lb. Fitch would expect working capital cash inflows to roughly offset lower EBITDA levels and free cash flow to be above $200 million. In a flat revenue environment, Fitch estimates Anixter would generate more than $200 million in annual free cash flow. --Fitch estimates that impact from copper prices and increasing U.S. dollar values relative to foreign currencies have offset revenue growth by roughly $66 million in the LTM. While the impact from these factors has been subdued relative to prior years given relatively stable copper prices and currency values, Fitch believes Anixter's exposure to copper and foreign currency generally increases volatility of profitability and cash flow generation, adding additional risk to the credit profile. --Anixter executed both share repurchases and dividends totaling $210 million in the LTM period ($57 million in share repurchases, and a special dividend of $153 million). Fitch expects that, aside from the upcoming $300 million convertible note maturity in March 2013, Anixter will continue to utilize excess cash and free cash flow for potential acquisitions and shareholder friendly actions rather than debt reduction. Share repurchases and special dividends in excess of free cash flow in the face of mounting macroeconomic concerns could pressure Anixter's rating if such action would be expected to lead to additional higher leverage once revenue growth returns. --Fitch estimates leverage at 2.5 times (x) in the LTM, (3.4x on an adjusted basis), which reflects elevated debt levels following Anixter's $350 million issuance in April. Fitch expects debt to decline slightly given the scheduled $300 million of convertible note maturity in March 2013. Fitch views leverage of 2.5x or below (3.5x adjusted) as reasonable for a 'BB+' rating given Anixter's business model and credit profile. Ratings strengths include: --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; --Working capital efficiency which allows the company to generate free cash flow in a downturn. Rating concerns continue to center on: --Historical use of debt and free cash flow for acquisitions and shareholder-friendly actions; --Thin operating margins characteristic of the distribution industry, albeit slightly expanded given the company's niche market position; --Significant unhedged exposure to copper prices and currency prices; --Exposure to the cyclicality of IT demand and general global economic conditions. Fitch believes Anixter's liquidity was adequate and consisted of the following as of Sept. 28, 2012: i) approximately $137 million of cash and cash equivalents; ii) $400 million of five-year revolving credit agreements maturing April 2016, of which, $243 million was available; and iii) an undrawn $300 million on-balance-sheet accounts receivable securitization program expiring May 2015. Total debt as of Sept. 28, 2012 was $1 billion and consisted primarily of the following: --$156 million outstanding under bank revolving credit lines; --$293 million in 1% convertible unsecured notes due March 2013; --$200 million in 5.95% senior unsecured notes due February 2015; --$31 million in 10% senior notes due February 2014; and --$350 million 5.625% senior notes due May 2019. The 1% convertible notes are issued by Anixter International and are structurally subordinated to the remaining debt which is issued by Anixter Inc. Anixter Inc. is the operating company under the parent company of Anixter International. WHAT COULD TRIGGER A RATING ACTION Negative: Future developments that may, individually or collectively, lead to negative rating action include: --Revenue declines that signal a loss of market share, either to other distributors or suppliers increasingly going direct to market; --Severe operating margin compression resulting from intense competition; --Significant debt-financed acquisitions and/or share repurchases, particularly if funded from cash generated from working capital declines. Positive: Upside movement in the ratings is limited given Anixter's history of shareholder-friendly actions. A long-term strategic business rationale and demonstrated commitment from management to maintain a higher rating would be necessary.