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17 Aug 2010
CFR B2 and PDR B3; Outlook stable
New York, August 17, 2010 -- Moody's Investors Service affirmed SoftLayer Technologies, Inc.'s
ratings ("SoftLayer"), including the B2 Corporate Family
Rating and the B3 Probability of Default Rating on the final structure
of the $500 million leveraged buyout by GI Partners and other private
equity investors, who will now own more than 70% of the company,
with the balance of equity held by management. The final terms
include an increase in invested equity to $250 million from the
previously contemplated $195 million and the elimination of the
$20 million revolving credit and the $20 million delayed
draw term loan, the previously assigned ratings for which have been
withdrawn. In addition, the term loan was reduced to $150
million from $190 million. The rating outlook remains stable.
The following is a list of today's rating actions and Moody's ratings:
..Issuer: SoftLayer Technologies, Inc.
.$20 million Secured Revolving Credit Facility,
B2 (LGD3 -31%) - Withdrawn
.$20 million Senior Secured Delayed Draw Term Loan,
B2 (LGD3 -31%) Withdrawn
.....Corporate Family Rating,
.....Probability of Default Rating,
.$150 million Senior Secured Term Loan, Affirmed
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 small scale and
short operating history. Moody's also believes that SoftLayer
will remain free cash flow negative over the next two years as the company
adds server capacity in its data center facilities. Although the
company's debt metrics have been enhanced in the near term by the
incremental equity capital contributed by its sponsors at closing of the
leveraged buy-out, the lack of a committed external credit
facility may constrain the company's liquidity in the future and
may act a s governor on the company's growth potential. Moody's
expects the company to operate in the 3.5x Debt/EBITDA (Moody's
adjusted, primarily for capitalized operating leases) range.
The ratings are supported by SoftLayer's strong and consistent growth
from providing hosting and managed services to Internet-centric
SMBs since its inception, and high EBITDA margins that can translate
into positive free cash flow once the company emerges from its growth
phase. However, Moody's remains concerned 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 our view, as competition evolves, SoftLayer's lack of customer
contracts, currently an anomaly in the data center services industry,
also constrains the rating.
Moody's expects SoftLayer to have good liquidity over the next twelve
months, as proforma for the proposed credit facilities the company
will have over $37 million of cash-on-hand 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. The
company's credit agreement mandates that it keep at least $10
million of unrestricted cash & equivalents on hand at all times.
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 term loan is secured by a first priority interest in and lien on substantially
all SoftLayer assets. The term loan, which comprises the
bulk of the company's debt capital structure, is rated B2
(LGD3-31%), in line with the CFR. This rating
is one notch lower than the LGD methodology-implied modeling template
suggests, being on the cusp of a B1 ratings, due to Moody's
subjective adjustments to the LGD framework in order to more appropriately
reflect the perceived collateral coverage of these debt obligations relative
to the overall waterfall of debts.
The principal methodologies used in rating Softlayer Technologies,
Inc were Global Telecommunications Industry published in December 2007,
Probability of Default Ratings and Loss Given Default Assessments published
in June 2009, and Moody's Approach to Global Standard Adjustments
in the Analysis of Financial Statements for Non- Financial Corporations
- Part I published in February 2006. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
SoftLayer Technologies, Inc. is a US-based provider
of dedicated hosting and managed data center services. The company's
headquarters are located in Dallas, TX.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms SoftLayer ratings on final deal structure
250 Greenwich Street
New York, NY 10007
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