Overview
— CDW, a leading North American reseller of IT products and services, is
redeeming $100 million of its subordinated notes due 2017. Pro forma leverage
as of Sept. 30, 2012, is 5.4x, down from 6x in fiscal 2011.
— We are raising our corporate credit rating to ‘B+’ from ‘B’.
— The stable outlook reflects our expectation that CDW’s consistent
operating performance will enable the company to maintain adjusted leverage
below 6x.
Rating Action
On Dec. 21, 2012, Standard & Poor’s Ratings Services raised its corporate
credit rating on Vernon Hills, Ill.-based CDW LLC to ‘B+’ from ‘B’. In
addition, we raised our senior secured debt rating to ‘B+’ from ‘B’, and our
senior unsecured debt rating to ‘B-‘ from ‘CCC+’. Our recovery ratings on the
senior secured and senior unsecured debt remain unchanged, at ‘3’ and ‘6’,
respectively. The outlook is stable.
Rationale
The rating action reflects a revision of our assessment of CDW’s financial
risk profile to “aggressive” from “highly leveraged”. We believe the company’s
consistent EBITDA margins, along with debt reductions over the past year, will
support its improved financial profile, despite highly competitive industry
conditions and a challenging economic environment.
CDW is the leading value-added reseller (VAR) of IT products, solutions, and
services to business, government, and education and health care customers in
the U.S. and Canada. It reaches its existing and prospective customers through
catalogs, direct mail, outbound telemarketing, Web sites and Web advertising,
and a direct sales force. CDW’s “fair” business risk profile reflects the
company’s good position in the highly fragmented reseller market for
technology products and services; this is offset by a narrow geographic
presence, relatively low-margin characteristics, and exposure to potential IT
spending weakness.
Revenues increased by 6.5% over the 12 months ended Sept. 30, 2012, and are
approximately $10 billion annually. Although revenue growth slowed to less
than 2% in the quarter ended Sept. 30, 2012, we expect ongoing
cost-containment efforts will enable CDW to maintain consistent profitability.
CDW’s adjusted annual EBITDA margin is in the low-7% area, which is good for a
distributor. However, CDW’s revenue and EBITDA base will remain vulnerable to
potential weakness in economic activity and IT spending. We have assessed
CDW’s management and governance as “satisfactory”.
CDW’s aggressive financial risk profile continues to reflect its 2007 LBO
legacy. Leverage remains high, but has improved to 5.4x (pro forma for the
recent debt redemption) as of Sept. 30, 2012, down from 6.7x in the prior-year
period. We expect moderate additional reductions in funded debt levels over
the next 12 months, incorporating the required 50% cash flow sweep in CDW’s
credit agreement.
Liquidity
CDW has “adequate” (as defined in our criteria) liquidity, with sources of
cash likely to exceed uses for the next 12 to 24 months. Cash balances were
$193 million as of Sept. 30, 2012. Although operating cash flow is seasonally
volatile primarily due to biannual interest payments, we expect annual free
operating cash flow (FOCF) in excess of $300 million will provide adequate
near-term liquidity. We expect near-term uses to include minimal required debt
maturities, and capital expenditures of less than $50 million in 2012.
Relevant aspects of CDW’s liquidity, in our view, are as follows:
— We see coverage of uses to be in excess of 1.2x for the next 12
months, including modest required debt maturities.
— We expect that net sources would be positive in the near term, even
with a 20% decline in EBITDA from last-12-months (LTM) levels.
— Material acquisitions are not likely or incorporated in the current
rating.
— Additional liquidity is provided by availability under CDW’s $900
million secured revolving credit facility maturing June 24, 2016.
— CDW has ample headroom under its senior leverage and fixed-charge
coverage maintenance tests, including the next leverage covenant step-down in
March 2013.
Recovery analysis
CDW’s senior unsecured issues are rated ‘B+’ with a ‘3’ recovery rating,
indicating our expectation of meaningful (50% to 70%) recovery of principal in
the event of a payment default. CDW’s senior unsecured and subordinated issues
are rated ‘B-‘ (two notches below the corporate credit rating on the company)
and the recovery rating is ‘6’, indicating our expectation of negligible (0%
to 10%) recovery of principal in the event of a payment default. For the
complete recovery analysis, see Standard & Poor’s recovery report on CDW, to
be published shortly on RatingsDirect.
Outlook
The stable outlook reflects CDW’s good market position, consistent
profitability, and improved leverage profile. Our view that the company’s
current ownership structure is likely to preclude sustained deleveraging
limits a possible upgrade. Although we don’t expect industry IT spending to
deteriorate, we could lower the rating if a decline in IT spending caused
revenues and EBITDA to decline and leverage to exceed 6x on a sustained basis.
Related Criteria And Research
— Top 10 Investor Questions For 2013: Global Technology, Dec. 5, 2012
— Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
— Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
— Key Credit Factors: Methodology And Assumptions On Risks In The Global
High Technology Industry, Oct. 15, 2009
Temporary contact numbers: Martha Toll-Reed (917-685-3188); Philip Schrank
Ratings List
Upgraded
To From
CDW LLC
Corporate Credit Rating B+/Stable/– B/Positive/–
Senior Secured B+ B
Recovery Rating 3 3
Senior Unsecured B- CCC+
Recovery Rating 6 6
Subordinated B- CCC+
Recovery Rating 6 6
CDW LLC
CDW Finance Corp.
Senior Secured B+ B
Recovery Rating 3 3
