Fitch Rates Avnet's Senior Unsecured Note Offering 'BBB-'; Outlook Stable
Fitch Ratings has assigned a 'BBB-' rating to Avnet Inc.'s (Avnet) proposed offering of senior unsecured notes. Fitch expects the proceeds from the offering will be used to refinance short term debt and for general corporate purposes.
The Rating Outlook is Stable.
Fitch expects that the transaction will not produce incremental debt. Fitch estimates leverage (total debt to total EBITDA) currently at 2.3x (2.8x when adjusted for operating leases) and expects leverage to remain at or below 2.5x pro forma for the debt offering (3.0x on an adjusted basis).
Avnet's recent performance underscores its exposure to cyclical demand patterns. As global IT demand has slowed, Avnet's revenues declined 6% in the latest 12 months (LTM), and operating profit declined 12.5% as margins have come under increasing pressure recently. However, Avnet continues to generate significant free cash flow with $110 in working capital cash inflows contributing to $700 million LTM free cash flow. Fitch believes recent restructuring announcements will be effective in preserving profitability in the face of competitive pressure given management's track record of doing so in recent years.
Credit strengths include Avnet's leading market positions in both component and enterprise computing distribution worldwide; the ability to generate cash from operations in a normal growth environment, 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 2012.
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 $1.8 billion consisting of: $1 billion of cash and cash equivalents as of Oct. 1; $747 million available under a $1.0 billion senior unsecured bank credit facility expiring November 2016; and $89 million available under the upsized $800 million A/R securitization facility expiring August 2013. Aside from the A/R securitization facility debt, Avnet's next substantial debt repayment is $300 million in 2014.
Total debt as of Sept. 29, 2012 was approximately $2.3 billion and consisted of:
--$240 million drawn on the company's $1 billion revolving credit facility expiring November 2016;
--$711 million drawn on the company's $800 million A/R securitization facility expiring August 2013;
--$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;
--$248 million in other short-term debt.
Fitch currently rates Avnet's IDR and senior unsecured debt 'BBB-'.
WHAT COULD TRIGGER A RATING ACTION
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 unlikely given Avnet's the razor-thin operating margin profile with significant cyclical demand exposure.
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. 8, 2012;
--'Evaluating Corporate Governance', dated Dec. 13, 2011;
--'Rating Technology Companies', dated Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
Rating Telecom Companies
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Jason Paraschac, CFA, +1 212-908-0746
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