-- 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
-- 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.
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.
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
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
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.
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
-- 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,
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.
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
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
WESCO International Inc.
WESCO Distribution Inc.
Corporate Credit Rating BB-/Positive/--
WESCO International Inc.
Senior Unsecured B
Recovery Rating 6
WESCO Distribution Inc.
Recovery Rating 6