TEXT - Fitch rates Arrow Electronics proposed notes
Feb 12 - Fitch Ratings has assigned a 'BBB-' rating to Arrow Electronics, Inc.'s (Arrow) proposed offering of $500 million in senior unsecured notes. Fitch expects a portion of the proceeds to be used to refinance Arrow's $332 million senior unsecured note maturing July 2013. KEY RATING DRIVERS: Credit strengths include the company's leading market positions in both component and enterprise computing distribution worldwide; the ability to generate cash from operations in a normal revenue growth environment, as well as achieve significant free cash flow in a downturn from reduced working capital; and a highly diversified supplier and customer base. Credit concerns include Arrow's thin operating margins, which are typical of the IT distribution market; significant investment levels required to increase share in the faster-growing Asia-Pacific region, including potentially debt-financed acquisitions; integration risk stemming from Arrow's acquisition growth strategy; Arrow's exposure to the cyclical demand patterns and cash flows associated with the semiconductor and networking sectors; and the potential for future partially debt-financed share-repurchase programs. As of Dec. 31, 2012, financial flexibility was solid with $410 million in cash and $1.1 billion available from a $1.2 billion senior unsecured revolving credit facility which expires in August 2016. Arrow has roughly $550 million available under a three-year $775 million accounts receivable securitization (ARS) facility maturing in December 2014. Fitch expects Arrow to produce strong free cash flow, with minimal working capital requirements. Fitch estimates that Arrow has produced average annual free cash flow in excess of $400 million over past five years. Total debt as of Dec. 31, 2012 was $2 billion and consisted primarily of: --$124 million drawn on the company's $1.2 billion revolving credit facility expiring August 2016; --$225 million drawn on the company's $750 million A/R securitization facility expiring December 2014; --$335 million 6.875% notes due 2013; --$258 million of 3.375% notes due 2015; --$199 million 6.875% senior debentures due 2018; --$300 million 6% notes due 2020; --$198 million 7.5% senior debentures due 2027; and --$249 million of 5.125% notes due 2021. Fitch currently rates Arrow as follows: --Issuer Default Rating (IDR) at 'BBB-'; --Senior unsecured notes at 'BBB-'; --Senior unsecured bank credit facility at 'BBB-'. The Rating Outlook is Stable. RATING SENSITIVITY: 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 Arrow's the razor-thin operating margin profile with significant cyclical demand exposure. Significant 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.