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Fitch Rates Arrow's $500MM Senior Unsecured Note Offering 'BBB-'
June 1, 2017 / 7:15 PM / 6 months ago

Fitch Rates Arrow's $500MM Senior Unsecured Note Offering 'BBB-'

(The following statement was released by the rating agency) CHICAGO, June 01 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Arrow Electronics, Inc.'s (Arrow) $500 million 10-year senior unsecured note offering. Arrow will use net proceeds for: i) funding up to a maximum of $285 million of the announced cash tender offer, ii) the redemption of $200 million of 6.875% notes due 2018, and iii) general corporate purposes. As of April 1, 2017, Arrow's total debt outstanding was $2.9 billion. A full list of ratings follows at the end of this release. Arrow announced a cash tender offer for up to a maximum aggregate consideration of $285 million for its 7.50% senior debentures due 2027, 6.00% notes due 2020, 5.125% notes due 2021, and 3.00% notes due 2018. The early tender deadline is June 14, 2017 and the offer expires June 28, 2017. KEY RATING DRIVERS Market Leadership and Scale: A leading enterprise computing and components distributor, Arrow offers customers and suppliers a global footprint that optimizes logistics and connects suppliers with fragmented distribution channels. Fitch believes Arrow will sustain a leadership position due to its broad product portfolio and scale that is not easily replicated without significant and sustained investments. Weak Position of Supply Chain: Arrow's low EBITDA margin profile reflects the constrained pricing power distributors have relative to suppliers and lower value-added nature of the distribution business. The largest customers go direct to the supplier and during slow growth periods suppliers tend to take more customers direct, exacerbating exposure to IT spending and semiconductor cyclicality. Moreover, semiconductor supplier consolidation results in broader product portfolios which disrupts the distributor business model and results in pricing pressure. Distributors have been investing in engineers for design and technical support to generate higher-margin demand-creation sales to help offset pricing pressure. FCF and Cyclicality: Fitch expects about $400 million to $500 million of mid-cycle annual FCF, driven by growth in components and software. Arrow is exposed to the cyclicality of semiconductor demand and IT spending causing significant swings to revenue and profitability. Fitch believes cyclicality is partially offset by Arrow's ability to convert working capital investments in accounts receivables and inventory into liquidity during prior downturns. Diversified Customer Base: Like most IT distributors, Arrow benefits from a diverse customer base with no customer accounting for more than 3% of revenue in 2016. Fitch does not expect exposure to increase meaningfully as Arrow focuses on growing the number of SMB customers. Modest Leverage: Fitch expects total debt adjusted for rental expense to operating EBITDAR (adjusted leverage) to remain below 3.5x over the intermediate term, and was 2.9x for the latest 12 months (LTM) ended April 1, 2017. Short-term spikes in leverage to accommodate modest acquisitions would be consistent with the rating. Capital Allocation Strategy: Fitch expects Arrow to continue to invest in engineering capabilities and growing services offerings but use excess cash flow to for acquisitions and share repurchases. Fitch expects acquisitions will be bolt-on in nature with average annual spend of $200 million over the rating horizon. In December, Arrow's board of directors authorized an incremental $400 million share repurchase program, increasing total availability to $520 million as of April 1, 2017. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: --Organic revenue growth in the low single-digits over the intermediate term, supported by components and software but partially offset by negative growth in legacy hardware products; --Expectation for mid-cycle operating EBITDA margins to remain stable at near mid-4%; --Mid-cycle FCF of $400 million to $500 million annually through the rating cycle; --FCF is used principally for share repurchases and bolt-on acquisitions; --Arrow would moderate share repurchases in the face of pressured FCF. RATING SENSITIVITIES Negative: --Fitch's expectation for adjusted leverage (adjusted debt-to-EBITDAR) to be sustained above 3.5x or gross leverage (unadjusted debt-to-EBITDA) to be sustained above 3.0x, most likely due to domestic cash limitations, debt-financed acquisitions and/or share repurchases; --The expectation for mid-cycle FCF-to-adjusted debt approaching 5% or below, resulting from a faster than anticipated shift in customer workloads to hyperscale cloud providers. Positive: Upside movement in the ratings is limited given Arrow's thin operating margin profile with significant cyclical demand exposure. Fitch believes strengthened credit protection measures paired with a long-term strategic business rationale and demonstrated commitment from management to maintain a more conservative financial policy would be necessary for positive rating actions. LIQUIDITY Arrow's liquidity is solid and supported by cash of approximately $522 million ($424 million held offshore) as of April 1, 2017 and the expectation for mid-cycle FCF of $400 million to $500 million through the forecast. Arrow has $1.76 billion of availability under its senior unsecured revolving credit facility (RCF), expiring December 2021, and $430 million available under the company's $910 million accounts receivable securitization (ARS) facility, expiring September 2019. In December 2016, Arrow amended its RCF, and increasing its borrowing capacity from $1.5 billion to $1.8 billion, and extended its maturity date to December 2021. The company also amended its ARS facility in September 2016, increasing its borrowing capacity from $900 million to $910 million and extended the maturity to September 2019. Total debt as of April 1, 2017 was $2.9 billion and consisted of: --$1.8 billion senior unsecured RCF due 2021 ($42.5 million drawn); --$480 million drawn on the company's $910 million accounts receivable securitization facility due 2019; --$200 million 6.875% senior unsecured notes due 2018; --$300 million 3.000% senior unsecured notes due 2018; --$300 million 6.000% senior unsecured notes due 2020; --$250 million 5.125% senior unsecured notes due 2021; --$350 million 3.500% senior unsecured notes due 2022; --$300 million 4.500% senior unsecured notes due 2023; --$350 million 4.000% senior unsecured notes due 2025; --$200 million 7.500% senior unsecured notes due 2027; --$91 million of other debt. FULL LIST OF RATING ACTIONS Fitch currently rates Arrow as follows: --Long-Term IDR 'BBB-'; --Senior unsecured revolving credit facility 'BBB-'; --Senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Zack Schroeder Associate Director +1-312-368-2056 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Jason Pompeii Senior Director +1-312-368-3210 Committee Chairperson Philip Smyth Senior Director +1-212-908-0531 Date of Relevant Rating Committee: April 11, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --No material adjustments have been made that have not been disclosed in public filings of this issuer. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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