CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Equinix, Inc.'s Long-Term Issuer Default Rating at 'BB'. In addition, Fitch has also assigned a 'BBB-'/RR1 rating to the EUR500 million Term Loan that is expected to be issued to partially pre-fund the previously announced acquisition of data centers from Verizon for $3.6 billion or for general corporate purposes. A complete list of rating actions follows at the end of this release.
Fitch's rating actions affect approximately $9.0 billion of total debt, including the $1.5 billion Revolving Credit Facility and $1.5 billion of capital leases. The Rating Outlook is Stable. The Stable Outlook is predicated upon Fitch's expectation of a balanced equity/debt financing for the $3.6 billion acquisition that is expected to close by mid 2017.
Fitch's affirmation of Equinix's ratings follows the company's announcement on December 6th, 2016 it plans to acquire from Verizon 29 data center facilities (24 sites) for $3.6 billion; the company expects the transaction to be closed by mid-2017. Fitch expects the transaction will be funded with a balance mix of debt and equity and that Equinix's leverage pro forma for the acquisition financing will remain within the expectations of the current 'BB' IDR. Permanent acquisition financing that substantially deviate from Fitch's expectation could potentially lead to negative rating action.
Fitch views Equinix's acquisition of the 29 Verizon data centers positively from a strategic perspective. The acquisition strengthens Equinix's position in the Americas with added capacity in existing markets, while expanding into new markets including Houston, Culpeper, and Bogota. The addition of Network Access Points (NAP) in Miami and Sao Paulo also strengthens Equinix's position into Latin America.
The acquisition adds new markets to Equinix including Houston, Culpeper, and Bogota. In other locations, the acquired assets would add to Equinix's existing capacity. Houston and Culpeper also enable the company to penetrate into new market segments including energy and government sectors. The Miami site would serve as a major access point into Latin America, strengthening Equinix's interconnection to the region. Of the 29 data centers, 21 will be facilities owned by Equinix; the company projects that post acquisition, 40% of its global revenues will be generated from owned assets, up from 35% prior to the acquisition.
Equinix projects the acquired assets to generate $450 million in revenues in the first twelve months, and $270 million in EBITDA, implying EBITDA margin of 60%, above Equinix current EBITDA margin of 45%. The higher margin reflects the maturity and higher utilization of the Verizon data centers and exclusion of G&A expenses from the acquisition.
The acquisition would increase the following Equinix Americas operating profile:
--Revenues increase by 26%;
--EBITDA increase by 33%;
--Number of IBXs increase by 53%;
--Gross capacity (sq. ft.) increase by 42%;
--Verizon's portfolio of 900 customers in the acquired facilities;
--Accelerates business relationships in government and energy sectors.
Key concerns for the acquisition include: Elevated leverage post acquisition and permanent funding mix between equity and debt. Fitch anticipates Equinix to grow its EBITDA in 2018 and Fitch rent-adjusted leverage to decline to below 5.0x within the 12 to 18 months following the acquisition.
The ratings and Outlook are supported by Equinix's leading market position and world-class reputation in data center colocation, geographically diverse and network-dense footprint, central position in the emerging hybrid cloud ecosystem, secular demand drivers for data center outsourcing, recurring revenue and stable customer base. Rating constraints include negative free cash flow from capital intensity and required REIT dividends, modest expected deleveraging over the rating horizon, debt-funded acquisitions, competitive nature of the data center industry and low unencumbered asset coverage.
KEY RATING DRIVERS
Rating strengths include:
--Scale, network density and reputation as a world-class premium colocation provider;
--Increasing interconnection revenue mix is the positive driver for growth, profitability, and retention;
--Stable business model highlighted by over 90% recurring revenue and churn consistently in the 2.0-2.5% range;
--Low customer concentration - its largest and top 10 customers account for 3.1% and 16.9% of total revenue, respectively.
Rating concerns include:
--Capital intensity from the high cost of building new capacity; Fitch expects capital intensity in the mid-20% range over the rating horizon;
--Required REIT dividends constrain FCF and limit ability to delever outside of EBITDA growth;
--Low unencumbered asset coverage due mainly to leasing the majority of its square footage.
Fitch's key assumptions within our rating case for the issuer include:
--Organic revenue growth of about 10% to 11% over the rating horizon excluding the Verizon acquisition; Fitch assumes contribution from the acquisition to start after mid-2017 with normalized growth rate of 3% as they are operating at a higher utilization rate;
--Fitch assumes the higher EBITDA margin from the acquired assets to provide a one-time enhancement to Equinix's operating profile, and normalizes thereafter;
--Recurring capex to scale with the higher revenue forecast at 4% of revenue; expansion capex of $50,000 per cabinet addition. Capex/revenue ratio in the mid-20% range over the rating horizon;
--Dividend payout ratio of approximately 45% to 50% of AFFO;
--FCF negative over the rating horizon; deficit financed through revolver draws;
--Balanced financing between equity and debt to fund the balance of Verizon data center acquisition.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Debt-financed acquisitions that increase leverage or dilute margins; financial impact will be considered in context of strategic rationale;
--Fitch's expectation of leverage (rent-adjusted) sustaining above 5.0x; or secured leverage sustaining above 3.0x
--Increased liquidity risk, potentially resulting from limited revolver availability as debt maturities approach.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Fitch's expectation of leverage (rent-adjusted) sustaining below 4.0x;
--Unencumbered asset coverage of about 2.0x;
--Consistent positive free cash flow generation, but still allowing for sufficient capital investment to maintain market leadership and premium offering.
Fitch believes that negative free cash flow over the rating horizon will cause Equinix to rely heavily on external funding to support its liquidity needs. As of 30 September 2016, the Company had $1.46 billion available under its $1.5 billion revolver ($39.7 million LOCs and $0 drawn). Required REIT dividend distributions will make it difficult for Equinix to add meaningfully to its cash balance ($988 million of cash and cash equivalents as of 30 September 2016). Fitch expects that Equinix will limit its revolver borrowings by raising new debt within the next few years. Failure to do so may result in heightened liquidity risk as debt maturities approach, and may result in a negative rating action.
While other REITs can often leverage unencumbered assets to address liquidity needs, Equinix's data centers are mostly leased, limiting sources of contingent liquidity. Its owned facilities, however, are mainly in top global markets, which should imply a lower capitalization rate in a sale or financing. Excluding Verizon, Fitch estimates unencumbered asset coverage of about 1.2x, assuming a 25% haircut to Company-owned net operating income (NOI) to account for ground leases on eight of its thirty-one owned facilities (Equinix does not disclose NOI by facility). This figure is subject to change, however, once there is more clarity around pro forma owned asset composition and associated NOI. Equinix's ability to leverage owned facilities may be limited by the availability of mortgage capital for data centers, which is not as deep compared with other commercial real estate property types.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following:
--Long-Term IDR at 'BB';
--$1,500 million senior secured Revolving Credit Facility at 'BBB-'/RR1;
--Senior secured Term Loan A at 'BBB-'/RR1;
--Senior secured Term Loan B at 'BBB-'/RR1;
--$3,850 million of unsecured Senior Notes due 2020-2026 at 'BB'/RR4.
Fitch rates the following:
--New EUR500 million senior secured Term Loan B at 'BBB-'/RR1.
Date of Relevant Rating Committee: 8 December 2016
Summary of Financial Statement Adjustments - No material financial adjustments have been made.
Additional information is available at www.fitchratings.com
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016)
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