March 4, 2016 - 5:59 PM EST
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Fitch Affirms Anixter's IDR at 'BB+'; Outlook Stable

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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Fitch Ratings
Primary Analyst
William Dickson
Associate Director
+1-212-908-0808
Fitch Ratings
33 Whitehall St
New York, NY 10002
or
Secondary Analyst
Jason Pompeii
Senior Director
+1-312-368-3210
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (March 4, 2016 - 5:59 PM EST)

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