OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Arrow Electronics, Inc. (Arrow), including the Long-term Issuer Default Rating (IDR) at 'BBB-'. The rating actions affect $3.75 billion of debt including the mostly undrawn $1.5 billion revolving credit facility (RCF). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATINGS DRIVERS

The ratings and Outlook reflect:

--Arrow's leading market positions in both segments of its business, the distribution of electronic components (Global Components) and distribution of Global Enterprise Computing Solutions (ECS). Arrow's growing scale and breadth continues to increase its importance and value in the global supply chain.

--Fitch's expectations for solid FCF through the cycle driven by higher profitability in a growth environment. In a downturn, cash from the liquidation of inventory should offset lower operating EBITDA and support FCF.

--Arrow's capital allocation policies with expectations for total adjusted leverage (total debt adjusted for rent expense to total operating EBITDAR) to remain below 3.5x, versus a Fitch estimated 3.0x as of Sept. 9, 2015.

--Fitch believes distributers will increasingly play a critical role in connecting cloud venders to the distributer channel given the scale and reach distributers provide.

--Low profit margins and high capital intensity as a percentage of EBITDA of the distributor model, as well as inherent end market cyclicality and significant swings in working capital investment.

--The company's inorganic growth strategy is also a potential source of event risk for bondholders, since larger acquisitions would also carry integration risk that is amplified by low profit margins. Fitch expects larger acquisitions would be at least partially debt-financed, potentially resulting in higher than expected leverage in the short term.

--Fitch's expectations for mid-cycle revenue growth in the low to mid-single digits over the intermediate term, driven by a recovery in European IT spending and increased demand from growing software and electronics content, offset by a slowdown in Asia.

--Fitch's expectation for mid-cycle operating EBITDA margins ranging from 4% to 5%. Fitch estimates operating EBITDA margin will be 4.7% for the LTM ending Dec. 31, 2015. In a downturn, Fitch expects operating EBITDA margin could approach 3%, as was the case in 2009.

--Fitch expects Arrow will use FCF for small bolt-on acquisitions, and share repurchases. Arrow has $469 million in remaining share repurchase authorization. The ratings incorporate Fitch's expectations Arrow would moderate share repurchases in the face of pressured FCF. Acquisition activity will likely be focused internationally in accordance with Arrow's growth strategy.

Credit strengths include the company's:
--Leading market positions and critical function, distributing components to small- and medium-sized customers worldwide;
--FCF through the cycle driven by higher profitability in a growth environment and the ability to generate solid FCF in a downturn from reduced inventory;
--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 Asia-Pacific region, including potentially debt-financed acquisitions and the attendant integration risks;
--Arrow's exposure to cyclical demand patterns associated with the semiconductor sector.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--The company will manage debt levels to maintain total adjusted leverage remaining below 3.5x;
--Expectation for mid-cycle operating EBITDA margins ranging from 4% - 5%;
--Revenue growth in the low to mid-single digits over the intermediate-term.
--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: Future developments that may, individually or collectively, lead to negative rating action include:

--Expectations adjusted leverage will be sustained above 3.5x, most likely due to domestic cash limitations or debt-financed acquisitions and/or share repurchases;
--Significant revenue declines and margin compression due to the SMB end-market shifting its technology spending away from distributers toward large cloud providers.

Positive: Upside movement in the ratings is limited given Arrow's thin operating margin profile and demand cyclicality. There would need to be a significant and sustained improvement in credit metrics and commitment from management to maintain more conservative financial policies.

As of Sept. 26, 2015, financial flexibility was solid with $337 million in cash ($60 million in U.S.) and $1.5 billion available from a senior unsecured revolving credit facility which expires in Dec. 2018. Arrow has roughly $420 million available under a $900 million accounts receivable securitization (ARS) facility maturing in March 2017. Fitch expects Arrow to produce solid FCF through the cycle with the liquidation of inventory during a downturn generally offsetting lower operating EBITDA.

Total debt as of Sept. 26, 2015 was $2.8 billion and consisted primarily of:

--$480 million drawn on the company's $900 million A/R securitization facility expiring March 2017;
--$200 million 6.875% senior debentures due 2018;
--$300 million 3.0% notes due 2018;
--$300 million 6% notes due 2020;
--$250 million of 5.125% notes due 2021;
--$350 million of 3.5% notes due 2022;
--$300 million 4.5% notes due 2023;
--$350 million of 4.0% notes due 2025; and
--$200 million 7.5% senior debentures due 2027.

Fitch has affirmed the following ratings for Arrow:

--Issuer Default Rating (IDR) 'BBB-';
--$1.5 billion senior unsecured revolving credit facility
'BBB-';
--Senior unsecured debt at 'BBB-'.

The Rating Outlook is Stable.