Fitch Rates Arrow's Proposed Senior Unsecured Note Offering 'BBB-'
NEW YORK -- February 12, 2013
Fitch Ratings has assigned a 'BBB-' rating to Arrow Electronics, Inc.'s
(Arrow) proposed offering of $500 million in senior unsecured notes. Fitch
expects a portion of the proceeds to be used to refinance Arrow's $332 million
senior unsecured note maturing July 2013.
KEY RATING DRIVERS:
Credit strengths include the company's leading market positions in both
component and enterprise computing distribution worldwide; the ability to
generate cash from operations in a normal revenue growth environment, as well
as achieve significant free cash flow in a downturn from reduced working
capital; and a highly diversified supplier and customer base.
Credit concerns include Arrow'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 Arrow's acquisition
growth strategy; Arrow's exposure to the cyclical demand patterns and cash
flows associated with the semiconductor and networking sectors; and the
potential for future partially debt-financed share-repurchase programs.
As of Dec. 31, 2012, financial flexibility was solid with $410 million in cash
and $1.1 billion available from a $1.2 billion senior unsecured revolving
credit facility which expires in August 2016. Arrow has roughly $550 million
available under a three-year $775 million accounts receivable securitization
(ARS) facility maturing in December 2014. Fitch expects Arrow to produce
strong free cash flow, with minimal working capital requirements. Fitch
estimates that Arrow has produced average annual free cash flow in excess of
$400 million over past five years.
Total debt as of Dec. 31, 2012 was $2 billion and consisted primarily of:
--$124 million drawn on the company's $1.2 billion revolving credit facility
expiring August 2016;
--$225 million drawn on the company's $750 million A/R securitization facility
expiring December 2014;
--$335 million 6.875% notes due 2013;
--$258 million of 3.375% notes due 2015;
--$199 million 6.875% senior debentures due 2018;
--$300 million 6% notes due 2020;
--$198 million 7.5% senior debentures due 2027; and
--$249 million of 5.125% notes due 2021.
Fitch currently rates Arrow as follows:
--Issuer Default Rating (IDR) at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Senior unsecured bank credit facility at 'BBB-'.
The Rating Outlook is Stable.
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 limited given Arrow's the
razor-thin operating margin profile with significant cyclical demand exposure.
Significant sustained improvement in credit metrics paired with a long-term
strategic business rationale and demonstrated commitment from management to
maintain a higher rating would be necessary.
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. 12, 2012;
--'Rating Technology Companies Sector Credit Factors', dated Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
Rating Technology Companies
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Jason Paraschac, CFA, +1-212-908-0746
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
John M. Witt, CFA, +1-212-908-0673
Jamie Rizzo, CFA, +1-212-908-0548
Brian Bertsch, New York, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.