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Global Credit Research - 01 Jul 2010
Approximately $230 Million of Rated Debt/Facilities Affected
New York, July 01, 2010 -- Moody's Investors Service assigned a B2 corporate family rating and a
B3 probability of default rating to SoftLayer Technologies, Inc.
("SoftLayer"). The rating agency also assigned a B2
(LGD3- 31%) rating to the company's new $230 million
senior secured credit facility, consisting of a $20 million
revolver, a $20 million delayed draw term loan, and
a $190 million term loan B. Borrowings will be used to refinance
existing debt and help fund a $483 million leveraged buyout of
the company by GI Partners, who will assume a 65% stake in
the company, with the balance of equity held by management.
The rating outlook is stable.
Moody's has taken the following rating actions:
..Issuer: SoftLayer Technologies, Inc.
.Corporate Family Rating, Assigned B2
.Probability of Default Rating, Assigned B3
.$20 million Secured Revolving Credit Facility,
Assigned B2 (LGD3 -31%)
.$20 million Senior Secured Delayed Draw Term Loan,
Assigned B2 (LGD3 -31%)
.$190 million Senior Secured Delayed Draw Term Loan,
Assigned B2 (LGD3 -31%)
SoftLayer's B2 Corporate Family Rating reflects the challenges of
solidifying a defensible competitive position in the fragmented hosting
segment of the data center services industry, the company's
high pro-forma financial leverage at closing of roughly 4.3x
Debt/EBITDA (Moody's adjusted, primarily for capitalized operating
leases), and its small scale and short operating history.
Additionally, SoftLayer is expected to generate negative free cash
flow and may subsequently have a constrained liquidity profile over the
next two years as the company adds server capacity in new data center
facilities. Moody's believes that deleveraging below 4.0x
by the end of 2011 may prove challenging as the company will likely utilize
its committed external debt financing to support the capital requirements
of its business plan. The rating is supported, however,
by SoftLayer's strong and consistent growth from providing hosting
and managed services to Internet--centric small- and medium-sized
businesses (SMB) since inception, and high EBITDA margins that can
translate into positive free cash flow once the company emerges from its
growth phase. Moody's remains concerned, though,
about the longer-term sustainability of that cash flow as the potential
commoditization of the various data center services may lead to price
competition. In Moody's view as competition evolves,
SoftLayer's lack of customer contracts, currently an anomaly
in the data center services industry, also constrains the rating.
The stable rating outlook reflects Moody's expectation that SoftLayer
will continue to capitalize on strong demand for server capacity by Internet--centric
SMBs over the next couple of years.
This is the first time that Moody's has rated the debt of SoftLayer.
Moody's expects SoftLayer to have adequate liquidity over the next
twelve months, as proforma for the proposed credit facilities the
company will have full access to its $20 million revolver and $20
million delayed draw term loan, to backstop its projected free cash
flow deficits that stem from plans to add server capacity in new data
centers. However, SoftLayer's liquidity may eventually
face pressure due to the company's need to continue to invest in
new and replacement server capacity. At closing, Moody's
expects the company's balance sheet cash to be roughly $5
The ratings for the debt instruments reflect both the overall probability
of default for SoftLayer, to which Moody's has assigned a B3 PDR,
and a below-average mean family loss given default assessment of
35% (or an above-average mean family recovery estimate of
65%), in line with Moody's LGD Methodology and typical treatment
for an all-first-lien senior secured debt capital structure.
The credit facilities will be secured by a first priority interest in
and lien on substantially all SoftLayer's assets. The facilities
are rated B2 (LGD3-31%), in line with the CFR,
as the senior secured facilities comprise the bulk of the capital structure.
The principal methodology used in rating SoftLayer was Moody's Global
Telecommunications Industry Methodology, published in December 2007
and available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website. Additional research and commentary is
available to subscribers at www.Moodys.com.
SoftLayer Technologies, Inc. is a US-based provider
of dedicated hosting and managed data center services. The company's
headquarters are located in Plano, TX.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Assigns B2 Corporate Family Rating to SoftLayer
No Related Data.
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