OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Ingram Micro, Inc. (Ingram) including its 'BBB-' Issuer Default Rating (IDR) and senior unsecured debt rating. Approximately $1.2 billion of debt Ingram's debt outstanding as of Oct. 3, 2015 is affected by Fitch's action. The Rating Outlook remains Stable. A full list of the current rating follows at the end of this release.

Today's affirmation follows Ingram's announcement that it has agreed to merge with Tianjin Tianhai in an all-cash transaction valued at approximately $6 billion. The affirmation was driven by Fitch's expectation that the ownership change will not result in significant changes to Ingram's capital structure, financial policies, or operating strategies. Fitch expects that Ingram's new owners will perpetuate the historically conservative management of Ingram's credit profile and that the financing put in place by HNA Group (HNA), a Chinese conglomerate and parent of Tianjin Tianhai, will not require a material call on the liquidity and cash flow generated by Ingram. The acquisition is part of Tianjin Tianhai's strategy of investing in supply chain and logistic industries. HNA has indicated that they will not significantly change Ingram's capital structure, strategic direction, or management team. HNA has also indicated that they do not intend to close or integrate facilities, warehouses, or systems.

In accordance with the terms of the transaction, Tianjin Tianhai will acquire Ingram's outstanding equity interests for $38.90 per share, representing a 39% premium relative to Ingram's average closing share price during the trailing thirty day period ended Feb. 16, 2016. The transaction is expected to close in the second half of 2016, subject to customary regulatory review. Approvals of both Ingram Micro's and Tianjin Tianhai's stockholders are required to approve the merger. Both boards have already approved the transaction. In line with the terms of the transaction Ingram will suspend its dividend and share repurchase program. Upon closing of the transaction Ingram will become part of the HNA group and will operate as a subsidiary of Tianjin Tianhai.

Change of control provisions for the revolver and securitization facility would be triggered; however, Fitch believes these facilities may be renegotiated with Ingram's lenders. Fitch acknowledges the heightened event risks related to the change of control provisions included within Ingram's outstanding senior unsecured notes. The change of control provision requires a credit rating downgrade below investment grade.

KEY RATING DRIVERS
The ratings and Outlook reflect Fitch's expectations for stable operating performance, consistent annual free cash flow (FCF) through the cycle, and solid credit protection measures. Fitch expects low- to mid-single digit revenue growth in constant currency over the intermediate term. Ingram's focus on value-added services for the faster growing small- to medium-size businesses (SMB) space, including mobility and supply chain solutions, will be key to accelerating revenue growth.

Fitch believes cloud computing growth and data center solutions for the SMB market will continue to present risks and opportunities, with wholesale cloud computing and data center solutions adoption by customers potentially shrinking Ingram Micro's addressable market. At the same time, these trends should increase complexity, which favor value-added services and wholesale distributors' wide product and service offerings.

Fitch expects operating EBITDA margin will remain thin but expand slightly over the intermediate term, driven by operating efficiencies and headcount reductions. Fitch also expects operating EBITDA margin will remain above 1.5% through the cycle. For the latest 12 months (LTM) ended Oct. 3, 2015, Fitch estimates operating EBITDA margin was 1.69%, versus 1.62% for the comparable prior year.

Fitch expects consistently positive annual FCF through the intermediate term with fluctuations driven by working capital investments to support growth. Countercyclical inventory supports cash flow within the context of negative revenue growth.

Fitch does not expect any material change to existing financial policies (outside of the suspension of dividends and share repurchases) and expects credit protection measures to remain solid for the rating through the intermediate term. Total debt adjusted for rental expense to operating EBITDAR (adjusted leverage) should remain below 3.5x over the intermediate term and was 2.4x for the LTM ended Oct. 3, 2015. Operating EBITDA to gross interest expense should remain near 10x or better over the intermediate term and was 9.1x for this LTM period.

Ratings strengths include:

--Broad customer and geographic diversification; --Scale of operations and geographic reach gives Ingram a competitive advantage in attracting and maintaining suppliers;
--Leading industry positions in the Americas, Europe, and Asia-Pacific;
--Importance of wholesale distribution model to both original equipment manufacturers (OEMs) and value added resellers (VARs).

Rating concerns include:

--Exposure to the cyclicality of IT demand and general global economic conditions, including current FX headwinds associated with the company's presence overseas.
--Low-margin and high working capital nature of the wholesale distribution model, which can lead to volatility in profitability and FCF, although lower inventory has historically provided a substantial source of liquidity during cyclical downturns.
--Significant reliance on Hewlett-Packard and Apple as suppliers.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:

--Ingram's acquisition by HNA does not significantly change Ingram's capital structure, operating profile, or strategy.
--Low- to mid-single-digit revenue growth in constant currency, driven by top line growth for the technology solutions businesses.
--Operating EBITDA margin will remain thin but expand slightly over the intermediate term.
--Consistently positive annual FCF through the intermediate term with meaningful fluctuations driven by significant working capital investments to support growth.
--Ingram will manage borrowings to maintain adjusted leverage below 3.5x over the intermediate term.
--Operating EBITDA to gross interest expense will remain near 10x or better over the intermediate term.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to negative rating action include:

--Ingram's new ownership structure results in significant changes to Ingram's current financial, operating, or strategic profiles; or

--Fitch's expectations for adjusted leverage sustained above 3.5x, driven by: (i) structurally lower operating EBITDA from sustained revenue declines or competitive pricing; or (ii) negative FCF from lower profitability in conjunction with diminished working capital efficiency.

Fitch does not anticipate positive rating action, given Ingram Micro's low profitability and significant working capital needs; however, positive rating actions could result from: (i) expectations for structurally higher FCF of $750 million to $1 billion from sustained revenue growth and modest profit margin expansion; and (ii) management's commitment to managing borrowings to maintain adjusted leverage below 2x.

LIQUIDITY
Liquidity was solid as of Oct. 3, 2015 and consisted primarily of $945 million in cash and cash equivalents ($463 million in the U.S.), an undrawn $1.5 billion senior unsecured revolving credit facility expiring January 2020 and approximately $675 million of capacity under a North American accounts receivable securitization program which expires April 2018. Ingram also has several additional committed and uncommitted receivable financing facilities which can provide further liquidity.

Ingram's debt primarily consisted of the following as of Oct. 3, 2016:

--$300 million of 5.25% senior notes due June 2017;
--$300 million of 5% senior notes due June 2022;
--$500 million of 4.95% senior notes due June 2024.

FULL LIST OF RATING ACTIONS

Fitch has affirmed Ingram's ratings as follows:

--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-'
--Senior unsecured credit facility at 'BBB-'.