Fitch Affirms Anixter International at 'BB+'; Outlook Stable.

NEW YORK -- Fitch Ratings has affirmed the following ratings for Anixter International Inc. (Anixter) and its wholly owned operating subsidiary, Anixter Inc. (AI):

Anixter

--Issuer Default Rating (IDR) 'BB+';

--Senior unsecured debt 'BB-'.

AI

--Issuer Default Rating (IDR) 'BB+';

--Senior unsecured notes 'BB+';

--Senior unsecured bank credit facility at 'BB+'.

Fitch's action affects approximately $700 million of public debt securities. The Rating Outlook is Stable.

The ratings and Outlook reflect Anixter's improved operating performance driven by a combination of a stable end-market demand environment, market share gains in the company's small but growing sales of fasteners and C-class components to original equipment manufacturers (OEMs) (approximately 18% of current sales), and operating leverage enhanced by higher than anticipated copper prices as well as cost savings from integrating recent acquisitions. Also considered is Anixter's well-diversified product, customer and supplier portfolios, and the information technology (IT) distribution industry's ability to generate cash from working capital during a downturn. Fitch also expects that Anixter will continue to be able to generate cash from operations even at growth rates in the low double-digits.

Rating concerns mainly center on the company's adequate but reduced liquidity position and Fitch's expectations that Anixter will continue using free cash flow for a combination of special dividends and acquisitions, although the company expects the pace of acquisition activity to slow over the near term as it shifts focus to integrating recent acquisitions. Fitch also considers the thin operating EBIT margins associated with the IT distributors and Anixter's unhedged exposure to commodity prices, which would affect operating income negatively if copper prices were to decline significantly.

Fitch believes that Anixter's EBITDA margins, which have steadily increased to 7% for the first half of 2006 compared to 5% in 2004, will remain near current levels due to the company's expectations for revenue growth of 2-3 times (x) world-wide gross domestic product (GDP) over the next few years and ongoing benefits from integrating historical acquisitions. Cost reductions should be somewhat mitigated by moderating benefits from rising copper prices, which have contributed meaningfully to Anixter's margin expansion over the past six quarters due to the company's cost plus pricing model. As a result, Anixter's credit protection measures should be flat to slightly stronger over the next few years, with EBITDA to interest expense near 11.0x, up from 10.3x for the latest 12 months (LTM) ended June 30, 2006, and total debt adjusted for rent expense to EBITDAR remaining between 3.0x and 3.5x.

After using approximately $65 million of cash over the past six quarters to fund organic revenue growth and working capital, Fitch expects Anixter will generate up to $100 million of annual free cash flow the next few years. Anixter's cash conversion cycle (CCC), which Fitch estimates fell to just under 90 days for the second quarter ended June 30, 2006 from almost 95 days in the prior year's quarter, is likely to remain near current levels and should enable Anixter to grow in excess of 10% without using cash from operations. Fitch believes debt reduction from record high levels is unlikely given the company's historical bias of using excess cash for shareholder-friendly actions. For example, Anixter paid almost $210 million in special dividends in 2004 and 2005 and repurchased $36 million of shares in 2003. Nonetheless, the ratings incorporate Fitch's expectations that Anixter will use increasing cash balances over the next few years for additional special dividends and/or small acquisitions.

Fitch believes Anixter's liquidity was sufficient but limited consisting of the following as of June 30, 2006:

--Approximately $21 million of cash and cash equivalents;

--$275 million, five-year revolving credit agreement maturing June 2009 ($163 million undrawn and available);

--$40 million Canadian revolving credit facility expiring June 2009 (approximately $6 million undrawn and available);

--Revolving credit facilities at other foreign subsidiaries totaling approximately $35 million (nominal amounts undrawn and available).

--$225 million on-balance-sheet accounts receivable securitization program expiring September 2007 (approximately $60 million was available as of June 30, 2006).

Total debt as of June 30, 2006 was approximately $700 million and consisted of:

--AI's $200 million 6% senior unsecured notes due 2015;

--Anixter's approximately $158 million accreted value of 3.25% zero coupon convertible senior notes due 2033;

--The aforementioned $178 million and $165 million of borrowings under the company's credit facilities and accounts receivable securitization program, respectively.

Anixter's zero coupon convertible senior notes are not guaranteed by AI and, therefore, are structurally subordinated to AI's debt.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.