Fitch Ratings has removed the Rating Watch Positive for the ratings of Tech Data Corporation (Tech Data) and upgraded the Issuer Default Rating (IDR) to 'BBB-' from 'BB+', as well as the company's senior secured term loan and senior secured last-out term loan facilities to 'BBB' from 'BBB-'/'RR1'.

The rating actions reflect the closing of the acquisition of Tech Data by SYNNEX and the application of Fitch's Parent-Subsidiary Criteria to equalize the IDRs of the two entities.

Fitch has also withdrawn the ratings following the closing of the transaction. Based on the application of Fitch's revised 'Corporates Recovery Ratings and Instrument Ratings Criteria,' dated April 9, 2021, Fitch has removed the entities from Under Criteria Observation (UCO).

The ratings are being withdrawn upon the closing of the acquisition of Tech Data by SYNNEX.

Key Rating Drivers

Market Leadership and Scale: The combination of SYNNEX with Tech Data creates the largest IT distributor under Fitch's coverage with revenue approaching $60 billion, which Fitch estimates represents a 4% share of the total global IT Distribution market. The company's relationship with over 1000 vendors representing nearly 200,000 hardware and software offerings, enables suppliers to optimize logistics and gain access to fractured sources of demand across 125,000 customers. The combined company will have number one market shares in both North America and EMEA. Fitch believes SYNNEX is likely to sustain its leadership position due to its critical role in generating sales for suppliers, global distribution footprint, access to emerging customer segments while shipping over $150 million of orders daily and enabling customers to access a broad product portfolio and design and engineering capabilities.

Significant FCF Scale: Fitch expects SYNNEX to generate consistent mid-cycle FCF margins of approximately 1.0%-1.5%, excluding transaction costs, leading to FCF scale averaging $700 million per annum over the forecast horizon. FCF is supported by minimal capital intensity that Fitch expects to remain below .5%, marginally below historical levels due to a more efficient operating footprint as the company consolidates overlapping facilities. Fitch believes the high absolute scale of FCF provides robust, reliable liquidity support that is representative of an investment grade credit profile.

Countercyclical FCF: SYNNEX has been able to offset the impact of past cyclical downturns by rapidly shrinking working capital, particularly inventory, resulting in a counter-cyclical FCF profile. During 2009, the company experienced volume declines of (10%)-(15%). However, FCF margins expanded 280 bps from the previous year, leading to FCF generation of nearly $240 million compared to approximately break-even levels in the prior year. Similarly, the softening demand environment that began in 2019, followed by the additional pressures from the coronavirus, resulted in 138% growth of FCF to $1.6 billion. Fitch believes the ability to sustain debt servicing capacity with improved FCF through a downturn contributes positively to a stable credit profile.

Commitment to Leverage Target: SYNNEX management has explicitly committed to a long-term leverage target of 2.5x EBITDA. While the company has demonstrated a willingness to exceed the target for M&A opportunities, management has prioritized leverage reduction to return to the target within an 18-month timeframe following an acquisition. Most recently, the 2018 acquisition of Convergys took pro forma leverage to 4.1x and was followed by $440 million in debt prepayment, reducing net leverage to 2.4x by YE 2019. Fitch forecasts pro forma fiscal 2022 leverage of 2.6x, declining to 2.2x over the ratings horizon, consistent with the peer average of 2.6x and Fitch's typical sensitivity range of 2.0x-3.0x for investment grade IT distributors.

Variable Cost Structure: Fitch expects SYNNEX to generate EBITDA margins in a consistent range of 2.5%-3.0% following the disposition of the company's customer experience services business, Concentrix Corporation, and acquisition of Tech Data. The slowing demand environment experienced in 2019, exacerbated by the pandemic in 2020, has resulted in moderate operating deleverage, however, the company's highly variable cost structure and execution on cost control prevented a more severe profit degradation, limiting margin compression to just 10 bps. While narrow profitability margins may lead to deteriorating leverage metrics during cyclical downturns, Fitch expects SYNNEX to mitigate such effects through its variable cost structure and strategy of deploying its countercyclical FCF towards reducing debt levels during adverse environments.

Constrained Pricing Power: The relative strength of suppliers constrains pricing power and limits margin expansion opportunities for SYNNEX. Suppliers may opt switch distributors or to transact directly with customers, reflecting the lower value-added nature of the distribution business. Pricing power is also limited by the relative bargaining power of suppliers with the company's top supplier responsible for 12% of revenue fiscal 2020. While margin expansion opportunities are limited compared to the broader Technology sector, Fitch believes breadth of product selection, global distribution capabilities and access to fractured client segments uphold SYNNEX's essential role.

Evolving Demand Environment: Emerging technology trends present risks and opportunities that the company must successfully navigate. Cloud software and hyper-converged infrastructure are deflationary for overall hardware demand, but may present IT distributors with new opportunities in services, software distribution and 'hardware-as-a-service.' New sources of demand from Automotive, Industrial and IoT present additional opportunities to expand into new end-markets. Finally, customer consolidation presents risks of reduced need for distributors as clients go direct to vendors. Fitch views SYNNEX as a likely overall net beneficiary of these trends relative to peers given the company's leading market position but notes that execution risks are elevated.

Derivation Summary

Fitch is evaluating the combination of SYNNEX and Tech Data, following the closing of the transaction. The combination will create the world's largest IT distribution and solutions companies, serving a critical role in the IT ecosystem by enabling the world's leading technology vendors to access fractured sources of demand. The company will serve one of the largest bases of resellers throughout the Americas, Europe and Asia-Pacific. Products are purchased directly from vendors in high volumes and are marketed to an active reseller base of over 125,000 VARs, direct marketers, retailers, corporate resellers and MSPs. The company will hold leading market positions with Tech Data contributing its number one share in EMEA and the combined entity surpassing competitor Ingram Micro's number one share in North America.

SYNNEX is most directly comparable to direct competitor, Ingram Micro (BB-) and Tech Data (BB+) prior to its acquisition, as well as Avnet and Arrow given partial product overlap and similar operating profiles for large distribution businesses, both rated 'BBB-'. Fitch forecasts that the company's EBITDA margins will remain in a consistent range of 2.5%-3.0%, in line with the 2.7% peer average and above the 2.0% long-term average of close competitor, Ingram Micro. In addition, Fitch forecasts FCF margins ranging 1.0%-1.5%, which compare favorably to the long-term break-even average FCF of peers.

SYNNEX maintains an explicit gross leverage target of 2.5x or below. While the company has demonstrated willingness to exceed the target in pursuit of strategic M&A opportunities, historically management has prioritized debt repayment in order to return to the long-term target within 18 months following an acquisition. The 2018 acquisition of Convergys took pro forma leverage to 4.1x and was followed by $440 million in debt prepayment, reducing net leverage to 2.4x by YE 2019. Similarly, the 2017 acquisition of Westcom-Comstor increased pro forma leverage to 2.8x, but was followed by $118 million of debt reduction, returning leverage to below the target within three quarters. Fitch forecasts pro forma fiscal 2022 leverage of 2.6x, declining to 2.2x over the ratings horizon, consistent with the peer average of 2.6x and Fitch's typical sensitivity range of 2.0x-3.0x for investment grade IT distributors.

The ability to tolerate leverage levels is supported by strong financial flexibility, represented by the company's counter-cyclical FCF profile. SYNNEX has been able to offset the impact of past cyclical downturns by rapidly shrinking working capital, particularly inventory, resulting in a counter-cyclical FCF profile. During 2009, the company experienced volume declines of (10%)-(15%). However, FCF margins expanded 280 bps from the previous year, leading to FCF generation of nearly $240 million compared to approximately break-even levels in the prior year. Similarly, the softening demand environment that began in 2019, followed by the additional pressures from the coronavirus, has resulted in 138% growth of FCF to $1.6 billion. Fitch believes the ability to sustain debt servicing capacity with improved FCF through a downturn contributes positively to a stable credit profile.

The ratings reflect the company's leading market share position, FCF scale, strong financial flexibility and countercyclical FCF profile, and variable cost structure. Ratings constraints include the willingness to exceed leverage targets in pursuit of strategic M&A, the company's narrow operating margins, a limited margin expansion opportunity and constrained pricing power. No country-ceiling, parent/subsidiary or operating environment aspects impact the rating of the combined companies.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Revenue: organic growth of 3% per annum, offset by disposition of Concentrix, plus contribution from the Tech Data acquisition;

Margins: EBITDA margin compression of 40 bps due to acquisition of lower margin Tech Data, expanding 10 bps per annum thereafter due to realization synergies, improved efficiency in global operating footprint, and operating leverage;

Shareholder returns: dividends of $20.5 million, growing 10% per annum; share repurchases paused during integration of Tech Data.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch does not anticipate positive rating action given low profitability and significant working capital needs; however, positive rating actions could result from:

Management's explicit commitment to maintaining total debt with equity credit/operating EBITDA leverage below 2.0x;

Expectations for improvement in operating profile that leads to sustained FCF margin expansion above 5%.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A sustained increase in total debt with equity credit/operating EBITDA leverage to above 3.0x;

Expectations for deterioration in the operating profile leading to sustained negative FCF.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity and Financial Flexibility: SYNNEX's liquidity is comfortable for the rating category, expected to be supported by nearly $650 million of cash at close and $3.5 billion of availability under the undrawn senior unsecured revolving credit facility, pro forma for the transaction. Liquidity is further supported by FCF that Fitch forecasts will average $700 million per annum. Fitch believes the company's counter-cyclical working capital profile, which results in improved FCF during a downturn, provides additional liquidity support during adverse macro environments. SYNNEX may also access additional sources of liquidity, not counted in Fitch's calculation of liquidity, including the $650 million accounts receivable securitization program and various uncommitted lines of credit. The company's diversified sources of liquidity provide significant operating flexibility with no need to access capital markets in the next 24 months.

Total funded and undrawn debt consists of:

$650 million senior secured accounts receivable securitization facility, undrawn, due 2022;

$3.5 billion senior unsecured revolving credit facility, undrawn, due 2026;

$1.5 billion senior unsecured term loan A, due 2026;

$700 million senior unsecured 1.250% notes due 2024;

$700 million senior unsecured 1.750% notes due 2026;

$600 million senior unsecured 2.375% notes due 2028;

$500 million senior unsecured 2.650% notes due 2031.

Issuer Profile

The combination of SYNNEX and Tech Data creates the number one global IT distributor with revenue of nearly $60 billion, offering more than 40,000 technology products including, peripherals, IT systems, system components, software, security, unified communications and networking equipment.

Summary of Financial Adjustments

Fitch made standard financial adjustments as described in the applicable ratings criteria.

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of Environmental, Social and Corporate Governance (ESG) Credit Relevance is a Score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
Tech Data Corporation	LT IDR	BBB- 	Upgrade		BB+
	LT IDR	WD 	Withdrawn		BB+

senior secured

LT	BBB 	Upgrade		BBB-

senior secured

LT	WD 	Withdrawn		BBB-

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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