Fitch Rates Avnet's Senior Unsecured Note Offering 'BBB-'; Outlook Stable
NEW YORK -- November 20, 2012
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
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
--$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
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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Brian Taylor, CFA, +1 212-908-0620
One State Street Plaza
New York, NY 10004
Jason Paraschac, CFA, +1 212-908-0746
Brian Bertsch, +1 212-908-0549
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