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Rating Action:

Moody's assigns Caa1 to Terremark's second lien notes

Global Credit Research - 11 Nov 2010

Approximately $545 million of debt securities rated

New York, November 11, 2010 -- Moody's Investors Service ("Moody's") assigned a Caa1 rating to Terremark Worldwide, Inc.'s ("Terremark" or the "company") $75 million second lien secured note issuance. The proceeds of the notes will be used for general corporate purposes, which will include the funding of the company's data center expansion. As part of the rating action, Moody's affirmed Terremark's B2 corporate family rating ("CFR") and B2 probability of default rating ("PDR"). The SGL-2 liquidity remains unchanged, indicating good liquidity, as the new note issuance will bolster the company's cash balances to fund the company's expansion plans.

..Issuer: Terremark WorldWide, Inc.

Assignments

....$75 million 2nd Lien Senior Secured Notes Due 2013, Assigned Caa1 LGD5 - 82%

....$470 million Senior Secured Notes Due 2017, Upgraded to B1 LGD3 - 36% from B1 LGD3 - 42%

Outlook is stable

Rating Rationale

Terremark's B2 CFR reflects the significant continuing execution risk from the company's ongoing expansion, increasingly competitive environment as the company grows its managed service business, high leverage, and the high capital intensity inherent in the company's business plans. Moody's believes Terremark plans to build out roughly 85,000 feet of additional rentable space through December 2011. Furthermore, the rating agency recognizes that Terremark's key credit metrics will remain in a state of transition through the end of fiscal year ending in March of 2012, as during that time Moody's expects the company's leverage to fall from over 6.7x on a Moody's adjusted basis pro-forma for the pending financing to roughly 4.4x at the end of FY2012, given the expected rapidly improving EBITDA once the announced build-outs are complete. Moody's also notes that if the company undertakes additional expansion projects, the expected deleveraging may be further delayed. As such, the company is weakly positioned within its B2 CFR.

On the other hand, Terremark's rating benefits from the favorable near-term trends for server hosting capacity in the US and the unique position of the company's cornerstone data center in Florida, and its growing relationship with the Federal government, which we believe somewhat reduces the uncertainty of future cash flows.

Although the company's financial leverage (Moody's adjusted Debt/EBITDA, including capitalized operating leases) remained relatively constant during 2010, due to the ongoing expansion and the wait time for new facilities to come online, Moody's expects the company's adjusted leverage to fall to about 6.1x on a Moody's adjusted basis at fiscal year-end 2011 (March 2011) from about 6.9x, at September 30, 2010 (proforma for the new financing). The reduction in leverage will be driven by the operating benefits that will accrue to Terremark, as it generates revenues from the leases on the 55,000 square foot colocation capacity that came online in the summer of 2010.

Terremark's SGL-2 liquidity rating indicates good liquidity. Over the 4-quarter horizon to December 31, 2011 Terremark's main source of liquidity is expected to be cash on hand, which pro-forma for the $75 million debt raise would be roughly $125 million. Against this, Terremark's main use of cash will be its likely cash burn of roughly $100 million to support its expansion plans over this 4-quarter period. Moody's notes that the company's liquidity position enables it to execute its expansion only up to the announced levels. Should the company proceed to add more space than what it has announced, it will need to raise additional debt or equity capital.

Rating Outlook

The stable outlook reflects Moody's view that the company will continue along a rational expansion path, whereby it will not commence construction of new data center facilities in advance of a solid demand in bookings.

What Could Change the Rating - Up

Given the aggressive expansion plan pursued by the company and the commensurate use of cash, a ratings upgrade is unlikely over the next year. However, rating migration could occur if Terremark successfully carries on the staged buildout of its planned expansion and successfully leases up the capacity in its data centers, such that adjusted Debt/EBITDA leverage trends to below 4.5x on a sustainable basis, and the company generates consistent positive free cash flow.

What Could Change the Rating - Down

Given the high project finance nature of the company's expansion plans, debt financed buildouts in addition to the current schedule continue to pressure the ratings. Ratings may also come under downward pressure, if industry pricing exhibit overcapacity trends spurring a new period of hypercompetition. The above factors may be evidenced in Terremark's performance, such that it is unable to grow operating cash flow from the new capacity it brings online and the company continues to burn cash and its leverage remains above 6.0x.

For additional commentary, please refer to Moodys.com.

Moody's most recent rating action for Terremark was in April 23, 2010, when the rating agency upgraded the company's CFR to B2 from B3.

The principal methodologies used in this rating were Global Telecommunications Methodology published in December 2007, Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations - Part I published in February 2006, Probability of Default Ratings and Loss Given Default Assessments published in June 2009, and Speculative Grade Liquidity Ratings published in September 2002.

Headquartered in Miami, FL, Terremark is a data company which operates four domestic and five international data centers, totaling about 330,000 square feet of rentable data center space.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Gerald Granovsky
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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New York, NY 10007
U.S.A.

Moody's assigns Caa1 to Terremark's second lien notes
No Related Data.
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