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Rating Action:

Moody's assigns Ba2 to CDW's new senior unsecured notes

16 Apr 2020

NOTE: On April 21, 2020, the press release was corrected as follows: In the methodology paragraph, the principle methodology was changed to Distribution & Supply Chain Services Industry. Revised release follows.

New York, April 16, 2020 -- Moody's Investors Service ("Moody's") assigned a Ba2 rating to the proposed senior unsecured notes to be issued by CDW LLC, a wholly-owned subsidiary of CDW Corporation ("CDW"). CDW's Ba1 Corporate Family Rating (CFR), stable outlook, and all other ratings are unchanged. Net proceeds from the new notes will be used for general corporate purposes including enhanced liquidity.

Assignments:

..Issuer: CDW LLC

....Gtd Senior Unsecured Notes, Assigned Ba2 (LGD5)

RATINGS RATIONALE

The proposed note issuance preserves CDW's very good liquidity which supports the company's ability to navigate through the challenges of the coronavirus outbreak (COVID-19) including a weakened economy in the company's primary markets in the U.S., Canada, and the UK. Given uncertainty and difficulty forecasting the COVID-19 impact on operating results, CDW has also withdrawn its 2020 targets (e.g. net sales growth, Non-GAAP Operating Income margin) and related financial information.

CDW's credit profile is pressured by Moody's expectation that revenues could decline in the mid to high single digit percentage range over the next 12 months. There are further downside risks in the event demand for CDW's offerings is depressed beyond the first half of 2020 in a scenario in which COVID-19 is not contained. 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 technology distribution sector has been one of the sectors affected by the shock given its sensitivity to enterprise demand and sentiment. More specifically, the weaknesses in CDW's credit profile, including its exposure to the global supply chain have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and CDW 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.

CDW's ratings are supported by the company's very good liquidity, including enhanced cash balances and good free cash flow generation, which can absorb mid to high single digit percentage revenue and EBITDA declines over the next several months. As of December 2019, adjusted debt to EBITDA was 2.3x. Assuming CDW issues up to $500 million of new notes and adjusted EBITDA were to decline up to 10%, adjusted leverage would remain just below 3.0x leaving some room under Moody's 3.5x adjusted debt to EBITDA downgrade trigger. The negative impact of higher gross leverage is offset by CDW's track record for adhering to disciplined financial policies, the benefits of securing additional liquidity, and the suspension of share buybacks which averaged $571 million annually over the last three years.

Ratings benefit from CDW's consistent track record of revenue growth and expanding free cash flow leading up to the COVID-19 crisis. For the three months ended March 31, 2020, CDW's top line grew 10.9%. As a leading multi-brand provider of IT solutions with a history of good execution, CDW has favorable prospects for maintaining market share due to its scale, extensive product offering, and broad market access relative to smaller value-added resellers of IT products. Nevertheless, Moody's recognizes CDW has reasonably high vendor concentration among its major suppliers, exposure to the more volatile spending patterns of small and medium-sized businesses (SMB) and exposure to budgetary risks of the public sector, which can be exacerbated during an economic recession.

Moody's expects CDW will maintain very good liquidity supported by ample cash balances and revolver availability. Upon completion of the note issuance, CDW estimates it will have over $600 million of cash and roughly $0.8 billion of availability under its unrated $1.45 billion senior secured ABL revolver (expires March 2022) after accounting for reserves tied to its floorplan sub-facility. CDW benefits from the absence of significant near-term debt maturities through 2022, and expectations for mid to high single digit percentage adjusted free cash flow to debt over the next 12 months despite the impact of COVID-19 and quarterly dividends. Free cash flow is supported by relatively stable operating margins (though low on an absolute basis, similar to other IT distributors) and low capital intensity with annual capex typically less than 1% of revenues. In addition to suspending share buybacks ($522 million to $657 million in each of the last three years), CDW is implementing cost initiatives. Moody's expects CDW to remain in compliance with its bank financial covenants (primarily incurrence tests) over the next 12 months.

CDW issues debt at its wholly-owned subsidiary CDW LLC, which holds all material assets and conducts all business activities and operations. Ratings for the senior secured term loan (Baa3) and senior notes (Ba2) reflect the overall probability of default of the company, incorporated in the PDR of Ba1-PD, and the expectation for an average family recovery in a default scenario.

CDW has reduced exposure to environmental risks as one of the largest North American IT distributors and solutions providers with annual revenues of $18 billion. Despite exposure to Cisco and HP Inc. for 25% of revenues, CDW has less reliance on any single program across its very broad offerings. This revenue diversity reduces risk in a scenario in which a given program is impacted by an environmental event. Similar to its peers, CDW has a B2B focus with minimal direct consumer exposure contributing to an overall low level of social risk.

CDW has a consistent track record for maintaining financial leverage within its public target range and adjusted free cash flow to debt in the mid teen percentage range or better, despite growing dividends, both of which allow CDW to fund growth investments. CDW adheres to its disciplined financial policies which include maintaining net leverage ratios between 2.5x and 3.0x (as defined). CDW is publicly traded with its two largest shareholder, Vanguard and Blackrock, owning roughly 12% and 9% of common shares, respectively, followed by other investment management companies holding less than 5%. Good governance is supported by a board of directors with ten of the company's eleven board seats being held by independent directors.

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

The stable rating outlook reflects Moody's expectation that, despite the potential for mid to high single digit percent revenue and EBITDA declines over the next 12 months, CDW will continue to generate free cash flow in the mid to high single digit percentage range (compared to 17% - 20% in each of the last three years) and be able to maintain adjusted debt to EBITDA below 3.5x. Moody's expects CDW to maintain disciplined financial policies including very good liquidity with ample cash balances and revolver availability to manage through the global pandemic.

Ratings could be upgraded if CDW demonstrates consistent revenue and free cash flow growth and sustains adjusted operating margins at current levels (5.9% - 6.3%) with a commitment to conservative financial policies including total adjusted debt to EBITDA being sustained below 2.5x and adjusted free cash flow to debt above 20%. Ratings could be downgraded if CDW experiences loss of customers/market share or pricing pressures due to the impact of COVID-19, increasing competition, or a weak economic environment, resulting in erosion of operating margins, interest coverage, or free cash flow. Adjusted debt to EBITDA being sustained above 3.5x or funding share repurchases prior to Moody's being assured of a long term rebound from COVID-19 could also lead to a downgrade.

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.

Based in Vernon Hills, IL, CDW is a leading IT products and solutions provider to business, government, education, and healthcare customers in the U.S. and Canada. Net revenue for the 12 months ending March 2020 totaled $18.4 billion but is expected to decline over the next 12 months due to the impact of the coronavirus outbreak.

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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