Wachovia analysts anticipate Tech Data spreads will fluctuate on financing

By Ronda Fears

Nashville, Feb. 7 - Tech Data Corp. credit spreads will likely widen on its acquisition of Azlan Group and a downgrade could occur but trading levels would likely spring back on the renewal of its bank facility in May, said Henry Voskoboynik and Dmitry Melnick, convertible analysts at Wachovia Securities, Inc., in a report Friday.

Tech Data announced on Thursday it will acquire Azlan for $235 million in cash and lowered its earnings guidance for fiscal 2004.

"In the past, we used a credit spread of 450 bps on this Ba2/BB+ rated name. Given the expected cash outlay for the acquisition and the deteriorating operating environment, we expect this credit spread to widen in the near term (a rating agency downgrade is also in the cards)," Voskoboynik and Melnick said in the report.

"At this time, we would be comfortable using a credit spread of 600 bps on Tech Data's converts, primarily due to ample available liquidity. However, it remains to be seen whether the company will be able to successfully renew the revolver and the asset securitization facility (both expire in less than four months).

"Once the facilities are renewed in May, we believe this credit could tighten back to 500 bps."

At 90.28, Tech Data's $290 million 2% convert due 2021 with a first put in 2005 trades with a current yield of 2.22%, yield to put of 5.75% and a premium of 115.13%. The implied credit spread is 488 basis points, using 40% volatility.

Using a credit spread assumption of 600 bps, the analysts noted the bond prices out 2.73% rich.

In December, Tech Data redeemed its $300 million 5% convertible issue with a combination of cash on hand and its available revolver.

Tech Data said it expects sales in the January quarter at or above the high end of its previous guidance of $3.80 billion to $3.95 billion but said earnings for fiscal 2004, which ends in January, could decline as much as 15% to 25% year over year, versus the current consensus expectation for 7.3% growth.

The company attributed the earnings shortfall to weak demand, gross margin pressure and increased investment in European systems infrastructure.

Tech Data ended the October quarter with cash and investments of $497 million. As of Oct. 31, Tech Data had additional available liquidity of $1.44 billion, comprising $500 million in a receivables securitization program secured by accounts receivable and expiring in May 2003, $250 million in a multicurrency revolver secured by stock and subsidiary guarantees and expiring in May 2003 and $690 million in unsecured short-term lines of credit.

The company was cash flow positive in the October quarter, generating operating cash flow of $86 million and free cash flow of $79 million.

Total debt at Oct. 31 was $626 million, made up of $590 million in two converts and $36 million in capital leases and other debt. Tech Data also had off-balance-sheet operating lease obligations totaling $250 million.

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