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Rating Action:

Moody's assigns Ba2 CFR to Tech Data (New) on Apollo buyout, outlook stable

15 Jun 2020

New York, June 15, 2020 -- Moody's Investors Service, ("Moody's") assigned a Ba2 Corporate Family Rating (CFR) and a Ba3-PD Probability of Default Rating (PDR) to Tech Data Corporation (New) ("Tech Data") in conjunction with the debt funded acquisition by funds of Apollo Global Management, Inc. ("Apollo"). As part of the rating actions, Moody's assigned a Ba1 to the proposed ABL revolver and ABL term loan, and a Ba2 to the first-in, last-out (FILO) ABL term loan. The outlook is stable.

Borrowings under the new debt facilities will be used to help fund the $6.1 billion purchase by Apollo. The proposed transaction has already received shareholder approval as well as regulatory approvals in most regions and is expected to close by June 30, 2020, subject to regulatory approval in Australia. Completion of the merger is not subject to a financing condition. Apollo Funds have committed up to $3.75 billion of equity and financial institutions have agreed to provide up to $2 billion in ABL term loans and a $3.0 billion ABL revolver (partially drawn).

Today's rating actions include the following assignments:

..Issuer: Tech Data Corporation (New)

....Corporate Family Rating -- Assigned Ba2

.Probability of Default Rating -- Assigned Ba3-PD

.....Gtd Senior Secured ABL Revolver -- Assigned Ba1 (LGD3)

.....Gtd Senior Secured ABL Term Loan -- Assigned Ba1 (LGD3)

.....Gtd Senior Secured FILO Term Loan -- Assigned Ba2 (LGD4)

.Senior Unsecured Notes -- Assigned B1 (LGD5)

.Speculative Grade Liquidity Rating -- Assigned SGL-1

..Outlook Actions:

....Outlook -- Assigned Stable

Rating assignments remain subject to Moody's review of the final transaction terms and conditions. Existing ratings for Tech Data Corporation will be withdrawn at closing of the transaction. To the extent any of Tech Data's existing unsecured notes remain outstanding after the close, a multiple notch downgrade of the unsecured rating is likely.

RATINGS RATIONALE

The Ba2 CFR reflects Tech Data's solid market position as a leading global distributor of IT products, solutions, and services in Europe and the Americas, with a small presence in Asia. Tech Data's broad base of offerings will allow the company to benefit from pockets of good demand, such as remote work and business continuity solutions, which will partially offset the likelihood for overall weak demand in the upcoming year. Moody's expects that, beyond the global recession, revenue growth will be supported by long term technology tailwinds including demand for IT solutions related to digital infrastructure, cloud migration, security, data analytics, Internet of Things, and 5G.

Nevertheless, disruptions caused by the COVID-19 pandemic on Tech Data's global operations, supply chain, and customer demand are likely to hamper operating performance. Over the next 12 months, Moody's expects total revenue will decline in the high single to low double-digit percentage range. "Operating margins of 1.7% - 1.8% (including Moody's standard adjustments) for the last two fiscal years are at the highest level since Moody's initiated ratings in December 2006; however, Moody's expects operating margins could decline over the next 12 months reflecting investments to achieve targeted costs reductions, lower revenues to absorb fixed costs, and potential incremental spending related to COVID-19 precautions including employee health and safety measures," stated Carl Salas, Moody's Senior Credit Officer.

At closing of the acquisition, funded debt balances will increase by roughly $1.2 billion to $2.6 billion resulting in estimated debt to EBITDA of 4.3x (including Moody's standard adjustments, 3.5x excluding a portion of off-balance sheet receivables financing). Adjusted leverage could temporarily increase to the high 4x range over the next couple of quarters as a result of the global recession; however, Moody's expects Tech Data will generate over $400 million of free cash flow over the next 12 months (more than 11% of adjusted debt), followed by adjusted EBITDA growth in calendar 2021. Maintaining very good liquidity is critical given adjusted operating margins of less than 2% and the need to manage working capital swings throughout the year. There could be downward pressure on Tech Data's ratings to the extent revenues remain depressed beyond calendar 2020 in a scenario in which COVID-19 is not contained.

"The Ba2 CFR is forward looking given credit metrics, including leverage, are expected to be outside the range for the assigned rating until the second half of calendar 2021," added Salas. Nevertheless, the Ba2 recognizes that cash flows for Tech Data can be countercyclical. In the 2009 economic downturn, annual revenues declined by 8% in fiscal January 2010, but free cash flow increased by more than 60% compared to fiscal 2008 and 2009 levels as reduced working capital generated cash. To the extent revenue declines over the next 12 months are steeper than expected, Moody's expects reduced working capital requirements will similarly free up cash allowing Tech Data to manage leverage and fund investments. Moody's believes Tech Data is positioned to return to revenue growth and 1.7%-1.8% adjusted operating margins when overall IT demand rebounds based on its leading position and scale with global reach. In addition, Tech Data is targeting initial annual cost reductions of $150 million, supported by increased centralization, expanded automation, and consolidation of legacy IT systems, among other initiatives.

Ratings incorporate Moody's expectation that Tech Data will maintain disciplined financial policies, despite the absence of maintenance or springing financial covenants based on leverage or coverage ratios. Typical of ABL structures, the primary limitations on debt advances is the borrowing base formula. As proposed, Moody's views the primary limitation on restricted payments is the requirement that excess availability under the borrowing base needs to equal the greater of $375 million or 15% of the borrowing base (equivalent to roughly $750 million at closing) pro forma for the restricted payment.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The Distribution and & Supply Chain Services sectors have been affected by the shock given their sensitivity to business demand and sentiment. More specifically, the weaknesses in Tech Data's credit profile, including its exposure to global economies have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Tech Data remains vulnerable to the outbreak continuing to spread. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

Tech Data has reduced exposure to environmental risks as one of the largest North American IT distributors. Geographic diversification has improved, but revenues continue to be exposed to its three largest partners, Apple, Cisco and HP Inc. Beyond these three vendors, there is limited reliance on any single program. This geographic and revenue diversity reduces risk in a scenario in which a given program is impacted by an environmental event. Governance risks are a key consideration given Tech Data's ownership by financial sponsors and history of debt financed acquisitions. Private equity ownership often leads to debt financed M&A or distributions to enhance equity returns. Lack of public financial disclosure and the absence of board independence are also incorporated in Tech Data's credit profile.

Ratings incorporate Moody's views that Tech Data will have less financial flexibility than its peers given Tech Data's all ABL debt structure. In contrast, industry peers have debt instruments that are largely unencumbered given no liens on the vast majority of their liquid assets (receivables and inventory). Moody's recognizes the revolver, term loan, and FILO term loan benefit from the 1st lien ABL structure supported by a borrowing base of eligible receivables and inventory, accordingly Moody's assumes an above average recovery in a distressed scenario.

The SGL-1 Speculative Grade Liquidity Rating indicates very good liquidity with 11% or more adjusted free cash flow to debt over the next 12 months and a minimum $1.7 billion of revolver availability under the $3 billion facility. Outstanding balances under the new credit facilities cannot exceed a borrowing base consisting of a portion of eligible receivables (roughly 85% of total borrowing base) and eligible inventory (roughly 15%). There are no financial maintenance covenants, but when the borrowing base availability decreases to less than the greater of 15% of the total base (roughly $750 million at closing) or $375 million, the company must maintain 1.0x fixed charges ratio (as defined); however, Moody's does not consider this test to be effective given the company is likely to be able to exceed the 1.0x coverage test even in a downside scenario.

Moody's assumes access to at least 80% of the proposed $3 billion revolver throughout the year given management estimates of the historical and forward looking borrowing base. As revenues and the borrowing base grow beyond calendar 2020 but remain below 2019 levels, Moody's expects access in calendar 2021 to increase above 80%.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook reflects Moody's expectation for sustained free cash flow generation, despite revenue and EBITDA declines over the next 12 months, allowing for debt reduction or investments. Following the global recession, Moody's expects Tech Data will return to low single digit percentage, organic top line growth supported by long term demand for IT solutions geared towards the digital transformation. Moody's expects benefits from initial cost cuts targeting $150 million of savings will partially offset pressure on operating margins from the global recession, eventually leading to margin expansion and increasing free cash flow with excess cash being applied to reduce debt balances. Moody's expects the borrowing base to provide ample room for seasonal revolver advances to manage working capital swings over the next 12 months.

Ratings could be upgraded if revenue and operating profits demonstrate consistent growth as a result of market share gains, improvements in product mix, or solid execution by management. In addition, operating margins would need to be sustained above 2% (Moody's adjusted) with consistent positive and growing free cash flow and leverage approaching 2.75x debt to EBITDA (Moody's adjusted). In addition, liquidity would need to be robust with ample availability under the borrowing base, and Tech Data would need to demonstrate adherence to disciplined financial policies.

Ratings could be downgraded if the impact of COVID-19 or heightened competition from distributors, IT solutions providers, or vendors/OEMs cause market share losses or incremental pricing pressure. Ratings could also be downgraded if Moody's expects adjusted debt to EBITDA will be sustained above 4x after calendar 2020, or if adjusted operating margins deteriorate to the low 1% range. A sustained decline in free cash flow or internal liquidity, including reduced availability under the borrowing base, or relaxation of key provisions under the debt facility agreements, including changes to eligibility percentages for receivables and inventory or borrowing base availability thresholds related to security, frequency of collateral audits, cash dominion, or negative covenants, could also pressure ratings.

One of the largest distributors of technology equipment and software in the world, Tech Data Corporation (New) provides IT products and solutions to value-added resellers, direct marketers, retailers, and corporate resellers. Based in Clearwater, FL, the company focuses on the small-to-medium sized business (SMB) segment, a market for which the large original equipment manufacturers (OEMs) and software publishers find inefficient to use direct sales. In November 2019, Apollo Global Management, Inc. entered into an agreement to acquire Tech Data resulting in a $6.1 billion take-private transaction expected to close by mid-2020.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Carl Salas
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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