WESCO Distribution, Inc. -- Moody's assigns ratings to WESCO's acquisition financing; Ba3 CFR affirmed
New York, November 14, 2012 -- Moody's Investors Service affirmed WESCO International, Inc.'s (parent of WESCO Distribution, Inc.) Ba3 corporate family rating and Ba3 probability of default rating. Moody's also assigned a Ba3 rating to the proposed $755 million senior secured term loan facility due 2019, consisting of a $605 million tranche that is an obligation of WESCO Distribution, Inc. and a CAD$150 million tranche that is an obligation of WDCC Enterprises Inc. (a Canadian holding company that will have an ownership interest in the assets of EECOL Electric Corporation -- "EECOL"). Moody's lowered the rating on WESCO Distribution, Inc.'s$150 million 7.5% senior subordinated notes due 2017 to B2 from B1. As part of this action, Moody's assigned an SGL-2 speculative grade liquidity rating. The ratings outlook remains stable.
As part of the financing, WESCO plans to expand the revolving credit facility due August 2016 (unrated), increasing the commitment to $600 million from a current size of $400 million. WESCO will also increase the size of the accounts receivable facility due August 2014 to $475 million from $450 million. Proceeds from the expanded revolving credit facility and accounts receivable facility, combined with proceeds from the proposed term loan facility will be used to fund the previously announced acquisition of EECOL for CAD $1.14 billion.
The acquisition will materially increase debt levels, and weaken credit metrics and liquidity over the near-term. We expect, however, that leverage will decline to the 3.5 times range over the next 12 to 18 months, owing to modest organic growth, the contribution from EECOL and other acquisitions completed in 2012, and debt reduction. The rating also considers the strategic benefits of the acquisition, which among other things, further strengthens the company's presence in Western Canada.
The downgrade of the senior subordinated notes rating reflects a significant increase senior secured debt in the pro forma capital structure (as per Moody's Loss Given Default Methodology).
The SGL-2 speculative grade liquidity rating reflects Moody's expectation that WESCO will maintain a good pro forma liquidity over the next twelve months, supported by expectations of solid free cash flow generation and solid headroom under revovler financial covenants. Weighing down on liquidity is the fact that the acquisition will materially reduce availability under the company's revolving credit facility and accounts receivable facility.
The following summarizes the ratings activity.
WESCO International, Inc.
Corporate family rating at Ba3
Probability of default rating at Ba3
Speculative grade liquidity rating at SGL-2
WESCO Distribution, Inc.
Proposed $605 million senior secured term loan due to 2019 at Ba3 (LGD3, 46%)
$150 million 7.5% senior subordinated notes due 2017 to B2 (LGD5, 83%) from B1 (LGD5, 70%)
WDCC Enterprises Inc. Rating assigned: Proposed CAD$150 million secured term loan due to 2019 at Ba3 (LGD3, 46%)
WESCO's Ba3 rating is supported by its moderate pro forma leverage, good coverage with EBITDA less capex to interest of 5.0 times expected near-term, and solid free cash flow generation through cycles. The rating is also supported by WESCO's business position as one of the few players of scale in the highly fragmented U.S. electrical distribution industry, a substantial revenue base, extensive product breadth, and good customer diversity. The Ba3 rating also considers WESCO's inherently thin operating margins as a distributor, the cyclicality of the business, limited global diversification, and a significant increase in acquisition activity that has weakened credit metrics.
The stable outlook reflects Moody's expectation that WESCO will continue to grow its revenue and earnings supported by modest economic growth in the U.S., and that it will refrain from additional debt financed acquisitions over the near term and apply free cash flow to debt reduction. The outlook also reflects Moody's expectation that WESCO will not encounter unforeseen challenges as it integrates EECOL.
The ratings could be upgraded if WESCO successfully integrates EECOL and increases profitability such that debt to EBITDA approaches 3.0 times and EBITDA less capex to interest expense exceeds 5.0 times while maintaining strong levels of free cash flow through business cycles. A ratings upgrade would also require that WESCO maintain a conservative financial policy with respect to shareholder enhancement activities and acquisitions.
The ratings could be downgraded if financial policy becomes more aggressive and/or an economic downturn leads to a contraction in profitability and operating margins such that debt to EBITDA approaches 5.0 times.
The ratings are subject to Moody's review of final documentation.
The principal methodology used in rating WESCO International, Inc. was the Global Distribution & Supply Chain Services Industry Methodology published in November 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
WESCO International, Inc. is one of the leading providers of electrical construction products and electrical, industrial, and communications maintenance, repair and operating supplies ("MRO") in North America. The company reported sales of $6.5 billion for the twelve months ended September 30, 2012.
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Daniel Marx Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Alexandra S. Parker MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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