Fitch Ratings has affirmed the ratings for Avnet, Inc. (Avnet) as follows:
--Issuer Default Rating (IDR) at 'BBB-';
--Senior unsecured bank credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.
Fitch's Stable Outlook for IT Distributors in 2012 reflects the companies' strong liquidity and counter cyclical cash flow models rather than its outlook for end market demand heading into 2012. While Fitch currently expects flat to slightly positive revenue growth in 2012 for the distributors, downside risk is significant with the potential for a severe and prolonged global recession in the mix. Fitch views a reasonable stress scenario for the distributors at this point in time as consisting of a mid-single digit decline in 2012 followed by a 20%-plus revenue decline in 2013. Under both scenarios, Fitch would expect significant margin compression but for EBITDA margins to remain positive across the sector. Free cash flow generation would be significantly positive given the expected resulting decline in working capital balances under such a scenario.
Fitch believes that Avnet would maintain its investment grade rating under such a scenario. This assumes that 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.
The ratings and Outlook incorporate the above considerations as well as the following:
--Fitch expects organic revenue growth to be modest at best in fiscal 2012. Fitch would expect EBITDA margins (currently 4.2% for LTM ending Oct. 1 2011) to be slightly pressured given choppy end market demand and macroeconomic concerns. In a stress scenario, Fitch would expect EBITDA margins to decline to the trough level of the last downturn, 3.2%, or moderately lower if revenue declines are more severe. In a flat revenue environment, Fitch estimates Avnet would generate approximately $500 million in annual free cash flow. In a stress scenario, Fitch would expect free cash flow to be near $1 billion.
--The ratings incorporate expectations that Avnet would maintain leverage (total debt to total operating EBITDA) of 2.5 times (x) or below (3.0x when adjusted operating leases) given Avnet's business model and credit profile. Fitch estimates leverage at 1.7x (approximately 2.1x adjusted) and interest coverage (EBITDA to total interest expense) at 12.2x as of Oct. 1 2011.
--Fitch expects uses of cash flow and excess cash will principally go to fund organic growth, working capital needs, potential small acquisitions, and share repurchases. Avnet's board recently authorized a $500 million share repurchase program, the first in 10 years. Fitch believes Avnet has headroom for a moderate amount of share repurchases given substantial liquidity and cash generative nature of the business. However, aggressive shareholder-friendly actions in the face of increasing macroeconomic uncertainty could pressure ratings if such action would be expected to ultimately result in higher leverage. Fitch believes Avnet could potentially pursue debt-financed acquisitions resulting in higher than expected leverage if opportunities arise going forward. Such a scenario could pressure ratings if Fitch did not reasonably expect that Avnet would reduce leverage closer to historical levels in the short-run through the use of free cash flow for debt reduction and EBITDA growth.
Credit strengths include Avnet's leading market positions in both component and enterprise computing distribution worldwide; the ability to generate cash from operations with revenue growth rates up to 15%, given the current margin profile and CCC days, as well as achieve significant free cash flow in a downturn from reduced working capital; a highly diversified customer base and well-diversified supplier base with only IBM representing greater than 10% of revenue as of July 2011.
Credit concerns include Avnet'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 Avnet's acquisition growth strategy; Avnet's exposure to the cyclical demand patterns and cash flows associated with the semiconductor and networking sectors; and the potential for future debt-financed share-repurchase programs.
Total available liquidity is estimated at $2 billion consisting of: $662 million of cash and cash equivalents as of Oct. 1; $1.1 billion available under a upsized $1.2 billion senior unsecured bank credit facility expiring November 2016; and $265 million available under the upsized A/R securitization facility expiring August 2012. Aside from the A/R securitization facility debt, Avnet's next substantial debt repayment is $300 million in 2014.
Total debt as of Oct. 1, 2011 was approximately $1.9 billion and consisted of:
--$62 million drawn on the company's $1.2 billion revolving credit facility expiring Nov. 2016;
--$485 million drawn on the company's $750 million A/R securitization facility expiring August 2012;
--$300 million 5.875% senior notes due March 2014;
--$250 million 6% senior notes due September 2015;
--$300 million 6.625% senior notes due September 2016;
--$300 million 5.875% senior notes due June 2020;
--$207 million in other short-term debt.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 12, 2011;
--'Evaluating Corporate Governance', dated Dec. 16, 2010;
--'Rating Global Technology Companies Sector Credit Factors,' dated Sept. 20, 2010.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Rating Global Technology Companies - Specific Rating Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=543285
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Contacts:
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