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Rating Action:

MOODY'S CONFIRMS LONG TERM RATING OF ARROW ELECTRONICS, INC., (SENIOR UNSECURED AT A3); OUTLOOK NEGATIVE

01 Sep 2000
MOODY'S CONFIRMS LONG TERM RATING OF ARROW ELECTRONICS, INC., (SENIOR UNSECURED AT A3); OUTLOOK NEGATIVE

Approximately $600 Million of Debt Securities Affected.

New York, September 01, 2000 -- Moody's Investors Service confirmed the senior unsecured rating of Arrow Electronics, Inc. at A3 following a review triggered by its recent announcement that it plans to acquire the U.S based distribution business of Wyle Components, Wyle Systems, and Atlas Services for approximately $840 million in cash. The confirmation reflects Arrow's strong and defensible global market position, and Moody's expectations that profitability and operating cash flow will continue to improve as the semiconductor upcycle progresses. The ratings outlook, however, is negative given that the current transaction will serve to maintain the company's financial leverage at an elevated level for its rating category. Additionally, given the ongoing global consolidation of the component and computer systems distribution business, the outlook reflects Moody's concern that further debt financed participation by Arrow in this consolidation activity may serve to strain financial leverage.

Moody's said that the rating and outlook incorporate the expectation that Arrow will raise significant levels of common equity and equity linked securities over the next few months, and that proceeds will be used to pay down debt incurred as part of the pending acquisitions. The rating agency went on to say that the acquisitions makes good strategic sense in terms of gaining further operational scale with which Arrow can better leverage its infrastructure and manage costs through cycles, and that the integration of the acquired businesses should not pose a material operational risk.

Ratings confirmed include

Arrow's senior unsecured debt at A3

Arrow continues to benefit from the developing semiconductor industry upturn which Moody's expects will last for several more quarters. After reaching a cyclical low of 3.4% in the first quarter of 1999, operating margins have increased in each quarter, reaching 5.8% in June 2000. While Moody's expects further increases over the next few quarters, we do not expect that operating margins will reach the last quarterly cyclical peak of 7.4% as a result of a greater mix of inherently lower margin computer systems business that is also experiencing stiff price competition (about 25% of revenues). Also, the spread of outsourcing has contributed to increased business with larger, formerly OEM-direct customers who tend to obtain somewhat better pricing terms than the traditional customer set of distributors. Moody's noted that while much smaller in absolute size, the businesses to be acquired have a slightly higher mix of lower margin computer systems business, which contributes to expectations of more limited operating margin expansion potential relative to previous cycles. Notwithstanding these dynamics, the overall operating outlook is good over the medium term.

As a result of the proposed debt financed acquisition, Arrow's financial leverage is expected to remain elevated given its business fundamentals and its rating category. Debt to book capitalization is expected to remain at the low to mid 50% level through the current fiscal year and retained cash flow to debt, while improving from a cyclical trough of 11% will likely remain below 20% at year end. EBIT interest coverage is expected to remain at or above 5 times over the next several quarters. While Moody's views Arrow's financial leverage as being stretched, the industry and company operating trends are positive, and the company's broad product line card, global reach, and wide range of service capabilities position it well for the future.

Moody's believes that the credit ratings will remain appropriate so long as management uses the good operating environment to prudently grow the business without further straining financial risk through debt financed acquisitions or share repurchases before the cycle inevitably turns. The negative outlook reflects the fact that there remain many acquisition opportunities globally, and Moody's belief that Arrow will continue to be an active player in the sector's global consolidation. Such activity could place downward rating pressure over time, depending primarily on how they are financed. The company maintains good liquidity, which is supported by access to a $550 million and $650 million revolving credit facility that mature in March and September 2001, respectively.

Arrow Electronics, Inc., headquartered in Melville, New York, is the world's largest distributor of electronic components and computer products to industrial and commercial customers

New York
Robert Konefal
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Richard J. Lane
Vp - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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