Fitch Ratings has affirmed the ratings for Anixter International, Inc.,
including the Long-term Issuer Default Rating (IDR) at 'BB+'. The rating
actions affect $1.3 billion of debt including the undrawn $150 million
revolving credit facility (RCF). The Rating Outlook is Stable. A full
list of ratings follows at the end of this release.
KEY RATING DRIVERS
Debt to EBITDA Target: Fitch believes Anixter has the capacity to meet
its debt to EBITDA target of 2.5x - 3.0x by the first half of calendar
year 2017 given Fitch's expectations that Anixter will have $100 million
to $200 million of annual FCF available for debt repayment over the
forecast period. Fitch acknowledges that large opportunistic
acquisitions could derail Anixter's deleveraging plans, but the company
has a demonstrated history of reducing leverage following debt financed
acquisitions.
Market Position: Anixter has a leading market position in niche
distribution markets, which Fitch believes contributes to Anixter's
above-average margins for a distributor;
Thin Operating Margins: Anixter has thin operating margins
characteristic of the distribution industry, which amplifies movement in
credit protection measures through the IT cycle;
Diversified: The company has broad diversification of products,
suppliers, customers and geographies, which adds stability to the
company's financial profile by reducing operating volatility;
Exposure to Copper Prices: Anixter has significant unhedged exposure to
copper prices and currency prices; however, the larger mix of services
in the recently acquired Power Solutions business reduces Anixter's
exposure to copper prices.
FCF in Downturn: Counter-cyclical inventory that allows the company to
generate free cash flow in a downturn from inventory liquidation.
Integration Risks: Anixter faces integration risk following the Power
Solutions acquisition. Integration missteps could impact planed leverage
reduction. Fitch anticipates Anixter will achieve approximately $40
million in run rate EBITDA synergies from the Power Solutions and Tri-Ed
acquisitions by 2018.
Aging Electric Grid: Fitch believes the aging electric grid in the U.S.
will drive medium- to long-term demand for Anixter's Utility Power
Solutions segment (approximately 19% of expected 2016 revenue). The
aging electric grid will need replacements, repair and upgrades. An
increasing mix of natural gas and renewables vs. coal for electric
generation will also drive opportunities around transmission and
substation projects.
Fitch believes the ratings have limited capacity to accommodate weak
demand from Anixter's industrial and OEM customers, which together
represent approximately 30% of revenues, due to global macro weakness
and reduced industrial investment. Many of Anixter's industrial
customers, particularly the customers with emerging markets exposure,
are in or service commodity related industries that have reduced
investment following step price declines in commodity prices.
Anixter's continued diversification of its business, including a larger
mix of services in the Power Solutions business will reduce the impact
of copper price volatility on gross profit margin. Contractual prices
are reset quarterly, further limiting the potential impact of copper
price volatility.
Anixter's costs with suppliers change to reflect the changing copper
prices, the mark-up to customers remains relatively constant, resulting
in higher or lower sales revenue and gross profit depending upon whether
copper prices are increasing or decreasing.
The degree to which price changes in the copper commodity spot market
correlate to product price changes, is a factor of market demand for
products. When demand is strong, there is a high degree of correlation
but when demand is weak, there can be significant time lags between spot
price changes and market price changes.
KEY ASSUMPTIONS
--Revenue synergies and share consolidation support longer-term organic
revenue growth in the low- to mid-single digit range. Near-term revenue
growth will be constrained by FX and commodity price headwinds.
--Acquisition activity will remain muted with Anixter focusing on
integration of Power Solutions, as well as continued integration of
Tri-Ed and rationalization post-sale of the fasteners business.
--Operating EBITDA margin ranging from 5.5% to 6% through the
intermediate-term, supported by higher revenues and increasing mix of
value added services, despite lower base line profitability for
utilities markets.
--Approximately $40 million of run rate EBITDA synergies from the Power
Solutions and Tri-Ed acquisitions by 2018.
--Lower blended capital and working capital intensity following the
divestiture of the Fasteners business supports more consistent FCF
through the cycle.
--Anixter will use FCF for debt reduction rather than shareholder
returns over the near-term, returning total leverage to below 3x by the
first half of calendar year 2017.
RATING SENSITIVITIES
Negative rating actions could occur if Fitch expects Anixter will
sustain debt to EBITDA above 3x or adjusted leverage (Total Debt plus 8x
annual rent expense to EBITDAR) above 4x likely due to shift in stated
financial policy toward special dividends or other shareholder returns
instead of debt repayment.
Fitch believes positive rating actions are limited in the absence of
management's commitment to more conservative financial policies,
including a meaningfully lower leverage target.
LIQUIDITY
Anixter's liquidity was adequate at Jan. 1, 2016 and was supported by:
--$151 million of cash;
--An undrawn $150 million revolving credit facility; and
--$210 million available under a $600 million A/R securitization
facility.
Annual FCF of $100 million to $200 million also supports liquidity.
Total debt was $1.7 billion as of 1/1/2016 and consisted primarily of
the following:
--$390 million under a A/R receivables facility due 2023
--$173 million Canadian term due 2020;
--$350 million 5.625% senior unsecured notes due May 2019;
--$400 million 5.125% senior unsecured notes due October 2021;
--$350 million senior unsecured notes due 2023.
Fitch currently rates Anixter as follows:
Anixter International, Inc.
--Issuer Default Rating (IDR) 'BB+';
Anixter Inc.
--IDR 'BB+';
--Senior unsecured notes 'BB+/RR4';
--Senior unsecured bank credit facility 'BB+/RR4'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 07 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000531
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000531
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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