Moody's Cuts Sirius' Credit Rating Amid Fears That Proposed Forsythe Buy Will Be Financial Strain

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Moody's Investors Service lowered Sirius Computer Solutions' credit rating from B1 to B2 out of concern that the planned purchase of Forsythe Technology will strain its financial flexibility.

The New York-based bond credit rating agency publicly disclosed that Sirius would pay $350 million to buy Forsythe, adding that the acquisition will be funded largely with debt. The ratings downgrade could, therefore, affect Sirius' ability to borrow money, with investors seeing the company as a riskier bet and demanding higher returns.

"Although the rating agency views the acquisition of Forsythe as strategically sound … execution risks and costs of integrating Forsythe will further strain the company's credit metrics over the next couple of years," Moody's wrote Tuesday in a rating action and credit opinion.

[Related: 10 Things You Need to Know About The Colossal Sirius-Forsythe Deal]

Skokie, Ill.-based Forsythe, No. 37 on the 2017 CRN Solution Provider 500, is expected to have $1.2 billion of sales in 2017, meaning that Sirius' purchase price was equivalent to 29 percent of current year revenue. In contrast, Office Depot agreed this week to acquire solution provider CompuCom for $1 billion, or 91 percent of the Charlotte, N.C.-based company's expected $1.1 billion in current year sales.

Sirius' adjusted debt rose to more than five times its EBITDA (earnings before interest, taxation, depreciation, and amortization) after being acquired by private equity giant Kelso & Co. in November 2015.

Moody's expected the debt-to-EBITDA ratio to fall after the Kelso purchase, but Sirius used debt and cash on hand to finance $81 million worth of acquisitions including Continuum Security Solutions, IBM-based infrastructure provider thinkASG, NorthWind Consulting Services, and U.S. government security and networking powerhouse Force 3.

The Forsythe acquisition will only further delay deleveraging plans, with Moody's expecting San Antonio, Texas-based Sirius, No. 26 on the 2017 CRN Solution Provider 500, to use the majority of its free cash flow in 2018 to repay debt.

Sirius has additionally needed to reorganize its procurement systems to accommodate the acquisition of its largest IT distributor partner – Avnet Technology Solutions – by Tech Data. Moody's believes the deal presents an incremental risk to Sirius' sourcing of high-end systems, especially if Tech Data encounters hurdles in its integration of operations.

Moody's expects that Sirius will likely explore options to diversify its supplier base and potentially reduce its large reliance on Tech Data's distribution capabilities. Tech Data declined to comment for this story, while Sirius didn't respond to requests for comment.

The rating agency also identified Sirius's high concentration of IBM products and services at a risk factor, with Moody's saying that Big Blue today accounts for 36 percent of Sirius's $2.2 billion in annual sales. That is down from 52 percent in September 2015, and the figure is expected to further decline to 23 percent – or $746.5 million of a combined $3.26 billion in revenue – once the Forsythe deal closes.

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