Moody's Upgrades CDW (CDW) CFR to 'B1', Outlook Stable
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Moody's Investors Service (Moody's) upgraded CDW Corporation's (Nasdaq: CDW) corporate family rating ("CFR") to B1 from B2 and its probability of default rating to B1-PD from B2-PD. The rating action concludes the review for upgrade commenced on June 17, 2013 following the company's announcement that it launched an initial public offering ("IPO") of its stock. As part of the rating action, Moody's upgraded the ratings on the senior subordinated notes issued at CDW's wholly owned subsidiary CDW LLC to B3 from Caa1, and confirmed the B3 ratings on CDW LLC's senior unsecured notes and the Ba3 ratings on CDW LLC's senior secured debt. The outlook is stable.
RATINGS RATIONALE
The CFR upgrade reflects the successful completion of the primary IPO with net proceeds of about $400 million and the resulting reduction of the company's debt, in addition to further expected debt pay-downs and ongoing interest expense savings in helping the company grow its free cash flow. CDW has deleveraged steadily since its 2007 leveraged buyout, and Moody's expects the company's adjusted debt to EBITDA to be in the 4.0x to 4.5 x range over the next year. Nonetheless, private equity owners (Madison Dearborn and Providence Equity) still hold around 73% of the company shares post-IPO, and Moody's believes that CDW may provide some support to aid the equity return to these holders, which could postpone CDW reaching its stated target debt to EBITDA level of around 3x. CDW's credit profile is supported by relative earnings stability and healthy free cash flow generation because of CDW's prominent position as a value added reseller of technology products and solutions with a focus on the small and medium sized business (SMB) segment. CDW has reduced its working capital utilization and Moody's anticipates the company's cash conversion cycle will remain at 20 to 25 days, limiting the use of cash. Moody's also believes CDW has favorable prospects for continued market share gains due to its scale, extensive product offering and broad market access relative to peers with less scale and market coverage.
Moody's maintained the company's SGL-2 rating indicating good liquidity, supported by availability under its secured revolving credit facility, lack of near-term debt maturities, expectation of about $350 million of free cash flow generation and ample room under its financial covenants over the next 12 months.
The ratings for the debt instruments reflect both the overall probability of default rating (PDR) of CDW at B1-PD, and the loss given default assessments of the individual debt instruments. The ratings on the subordinated debt were upgraded one notch in line with the CFR upgrade. The ratings on the senior unsecured and senior secured debt were not upgraded due to the ongoing pay-downs of subordinated debt with proceeds from senior secured borrowings, which removes the loss absorption that the subordinated debt provided in the capital structure.
The following summarizes CDW's ratings and today's rating actions:
..Issuer: CDW Corporation
.... Corporate Family Rating Upgraded to B1
.... Probability of Default Rating Upgraded to B1-PD
..Issuer: CDW LLC
....Senior Subordinated Regular Bond/Debenture Oct 12, 2017, Upgraded to B3 (LGD6, 95 % )
....Senior Secured Regular Bond/Debenture Dec 15, 2018, Confirmed at Ba3 (LGD3, 34 %) from Rating on Review
......Senior Unsecured Regular Bond/Debenture Apr 1, 2019, Confirmed at B3 (LGD5, 78%) from Rating on Review
....Senior Secured Bank Credit Facility Apr 29, 2020, Confirmed at Ba3 (LGD3, 34 %) from Rating on Review
Outlook Actions:
....Outlook, Stable
Rating Outlook
The stable rating outlook reflects CDW's relatively consistent revenue stream from the public sector, which counteracts greater fluctuations in corporate sector revenue, as well as Moody's expectation for continued execution of its business strategy, stable vendor/customer relationships and market share gains.
What Could Change the Rating - Up
Ratings could be upgraded if CDW's revenue and operating margins improve to a higher sustainable range (operating margins in upper single digits), through gains in market share, higher profit product and services mix and/or a lower cost structure. Further steady debt reduction, such that total adjusted debt to EBITDA leverage is expected to be sustained below 3.5x, would be an important additional consideration for any rating upgrade.
What Could Change the Rating - Down
Ratings could be downgraded if CDW experienced loss of customers/market share or pricing pressures due to increasing competition or a weak economic environment led to margin erosion and impaired interest coverage, reduced free cash flow generation and financial leverage sustained above 4.5x total adjusted debt to EBITDA. A sustained rise in working capital could also pressure the ratings down.
The principal methodology used in this rating was the Global Distribution & Supply Chain Services Industry Methodology published in November 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
RATINGS RATIONALE
The CFR upgrade reflects the successful completion of the primary IPO with net proceeds of about $400 million and the resulting reduction of the company's debt, in addition to further expected debt pay-downs and ongoing interest expense savings in helping the company grow its free cash flow. CDW has deleveraged steadily since its 2007 leveraged buyout, and Moody's expects the company's adjusted debt to EBITDA to be in the 4.0x to 4.5 x range over the next year. Nonetheless, private equity owners (Madison Dearborn and Providence Equity) still hold around 73% of the company shares post-IPO, and Moody's believes that CDW may provide some support to aid the equity return to these holders, which could postpone CDW reaching its stated target debt to EBITDA level of around 3x. CDW's credit profile is supported by relative earnings stability and healthy free cash flow generation because of CDW's prominent position as a value added reseller of technology products and solutions with a focus on the small and medium sized business (SMB) segment. CDW has reduced its working capital utilization and Moody's anticipates the company's cash conversion cycle will remain at 20 to 25 days, limiting the use of cash. Moody's also believes CDW has favorable prospects for continued market share gains due to its scale, extensive product offering and broad market access relative to peers with less scale and market coverage.
Moody's maintained the company's SGL-2 rating indicating good liquidity, supported by availability under its secured revolving credit facility, lack of near-term debt maturities, expectation of about $350 million of free cash flow generation and ample room under its financial covenants over the next 12 months.
The ratings for the debt instruments reflect both the overall probability of default rating (PDR) of CDW at B1-PD, and the loss given default assessments of the individual debt instruments. The ratings on the subordinated debt were upgraded one notch in line with the CFR upgrade. The ratings on the senior unsecured and senior secured debt were not upgraded due to the ongoing pay-downs of subordinated debt with proceeds from senior secured borrowings, which removes the loss absorption that the subordinated debt provided in the capital structure.
The following summarizes CDW's ratings and today's rating actions:
..Issuer: CDW Corporation
.... Corporate Family Rating Upgraded to B1
.... Probability of Default Rating Upgraded to B1-PD
..Issuer: CDW LLC
....Senior Subordinated Regular Bond/Debenture Oct 12, 2017, Upgraded to B3 (LGD6, 95 % )
....Senior Secured Regular Bond/Debenture Dec 15, 2018, Confirmed at Ba3 (LGD3, 34 %) from Rating on Review
......Senior Unsecured Regular Bond/Debenture Apr 1, 2019, Confirmed at B3 (LGD5, 78%) from Rating on Review
....Senior Secured Bank Credit Facility Apr 29, 2020, Confirmed at Ba3 (LGD3, 34 %) from Rating on Review
Outlook Actions:
....Outlook, Stable
Rating Outlook
The stable rating outlook reflects CDW's relatively consistent revenue stream from the public sector, which counteracts greater fluctuations in corporate sector revenue, as well as Moody's expectation for continued execution of its business strategy, stable vendor/customer relationships and market share gains.
What Could Change the Rating - Up
Ratings could be upgraded if CDW's revenue and operating margins improve to a higher sustainable range (operating margins in upper single digits), through gains in market share, higher profit product and services mix and/or a lower cost structure. Further steady debt reduction, such that total adjusted debt to EBITDA leverage is expected to be sustained below 3.5x, would be an important additional consideration for any rating upgrade.
What Could Change the Rating - Down
Ratings could be downgraded if CDW experienced loss of customers/market share or pricing pressures due to increasing competition or a weak economic environment led to margin erosion and impaired interest coverage, reduced free cash flow generation and financial leverage sustained above 4.5x total adjusted debt to EBITDA. A sustained rise in working capital could also pressure the ratings down.
The principal methodology used in this rating was the Global Distribution & Supply Chain Services Industry Methodology published in November 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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