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impact on operating results, CDW has also withdrawn its 2020 targets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
