Fitch Downgrades Anixter Inc. to 'BB+'; Outlook Stable

Business Wire, Sept 16, 2005

NEW YORK -- Fitch Ratings has lowered Anixter Inc.'s (Anixter) senior unsecured debt to 'BB ' from 'BBB-' and Anixter International Inc.'s (Holding Company) approximately $150 million accreted value of 3.25% zero coupon convertible senior notes due 2033 to 'BB-' from 'BB '. Fitch has also assigned a 'BB ' rating to Anixter's bank credit facility. The Rating Outlook is Stable. Approximately $485 million of debt is affected by Fitch's action.

The downgrade reflects today's special dividend announcement and Fitch's belief that this transaction, Anixter's second special dividend in the past two years, represents management's increased comfort with both shareholder-friendly actions and higher debt levels. On Sept. 15, 2005, Anixter's Board of Directors declared the payment of a special dividend of $4.00 per common share, or approximately $150 million. The special dividend is payable on Oct. 31, 2005, to shareholders of record on Oct. 14, 2005. Fitch expects this special dividend payment will be primarily debt-financed and result in Anixter having less financial flexibility and credit metrics not reflective of an investment grade company. While near-term liquidity will be strained, the Stable Rating Outlook reflects Fitch's expectation that Anixter will reduce all-time high debt levels from ongoing modest free cash flow, even with revenue growth approaching 10%.

Rating concerns center on the thin operating margins associated with the distribution industry, ongoing pricing pressures in certain markets related to industry wide excess capacity, and significant working capital investments necessary to reach longer term growth targets. In addition, Fitch believes integration and execution risks remain for the company to make recent acquisitions successful. Positively, Anixter's ratings continue to be supported by the company's leading market position, diverse portfolio of products and customers, significant scope and global reach, and the information technology distributors' working capital operating model, where the company can generate cash from working capital during a downturn or at mid-single-digit growth rates.

Pro forma the payment of the special dividend, which Fitch expects will be primarily debt-financed, and completion of the Infast Group plc acquisition in the current quarter, Anixter's liquidity is sufficient to meet near-term debt obligations despite significantly reduced cash levels for the near term. Nonetheless, Fitch expects Anixter to generate cash mostly from working capital during the second half of 2005, due to seasonally lower sales growth. While Fitch expects the company to access various non-U.S. credit facilities to fund these aforementioned transactions, liquidity continues to be supported by a $225 million accounts receivable securitization program expiring Sept. 30, 2005 (of which approximately $110 million was outstanding), and $275 million five-year senior unsecured revolving credit facility expiring June 18, 2009 (of which, due to financial covenants, approximately $188 million was permitted to be borrowed as of July 1, 2005). As a result, Fitch estimates pro forma total debt-to-operating EBITDA will exceed 3.0 times (x), a historical high for the company, while leverage adjusted for rental expense may exceed 4.0x. Although Fitch expects these metrics to improve over the intermediate term from a combination of debt reduction and higher profitability, mainly due to the integration of Infast and continued growth of Anixter's OEM fasteners business, management's actions indicate that the company is comfortable operating at pro forma metrics. Any further shareholder-friendly transactions or significant debt-financed acquisitions could result in further negative rating actions.

Total debt at July 1, 2005, was approximately $485 million and consisted primarily of Anixter's $200 million 6% senior unsecured notes due 2015, Anixter International's approximately $150 million accreted value of 3.25% zero coupon convertible senior notes due 2033, and the aforementioned borrowings under Anixter's accounts receivable securitization program and credit facilities. The Holding Company's zero coupon convertible senior notes are not guaranteed by Anixter and are structurally subordinated to Anixter's debt.

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