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02 Mar 2011
New York, March 02, 2011 -- Moody's Investors Service has assigned a B1 (LGD3- 30%)
rating to the $50 million expansion of Telx's Senior Secured
Term Loan maturing 2015. The incremental term loan will be used
for general corporate purposes, including funding the company's
data center expansion plans. As part of the rating action,
Moody's affirmed Telx's corporate family rating ("CFR") of B2 and
probability of default rating ("PDR") of B3, and maintained
the stable rating outlook. In addition, Moody's affirmed
the B1 ratings of the exitsing term loan and the $25 million revolving
Telx's B2 Corporate Family Rating reflects the company's high leverage
for its rating category, the high capital intensity inherent in
the company's business plans, and its rapid footprint expansion
as Moody's believes the company will continue to increase capacity over
the next several years. Following the new term loan issuance Moody's
expects that consolidated Debt/EBITDA leverage at Telx will be approximately
7.8x on a Moody's adjusted basis (adjusted for operating leases).
Moody's believes that the company will have the capability to manage its
adjusted leverage to under 6.0x over the next two years,
mainly driven by the expectations of improving EBITDA once the build-outs
are complete and the company begins to generate revenues from new leases
associated with its expanded capacity. However, the rating
incorporates the probability that if the company undertakes additional
expansion projects, the expected deleveraging may be delayed.
In addition, Moody's is concerned about the increase in the
company's expense base to drive revenue growth, which could
signal a more competitive operating environment going forward and the
commensurate margin pressure.
The rating is supported by Telx's position as a leading regional independent
operator of carrier-neutral data center facilities to large enterprises,
content distributors and Internet companies, along with providing
customers with interconnection services at the company's points of presence
at critical gateway locations to the Internet. Thus, Moody's
recognizes the favorable near-term trends for data center services
across the world, as the still-rapidly growing Internet usage
and the ongoing migration to IP information technologies are driving the
rise in demand for outsourced technology services. This is evidenced
by the revenue stability of the company's existing customer contracts
as churn remains below 1%.
The rating also reflects Telx's "good" liquidity over
the next 12 months. Moody's expects the company to end the
first quarter of 2011 with about $80 million in cash on the balance
sheet, with no outstandings under its $25 million revolver.
Moody's expects the company to rely on its cash balances to fund
its capex needs during the next four quarters. As such, the
company's free cash flow metrics are anticipated to be strained until
the planned expansion program is completed. Moody's does
not anticipate financial covenant compliance issues over the next four
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 Telx 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 Telx'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 6.5x.
Moody's most recent rating action for Telx was on June 16, 2010.
At that time Moody's assigned a B1 rating to Telx's senior secured
The principal methodologies used in this rating were the Global Telecommunications
Industry published in December 2007 and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Headquartered in New York, NY, Telx Group is a provider of
network neutral, global interconnection, and colocation services.
As of September 30, 2010, the company operates 15 interconnection
and colocation facilities in multiple regions across the United States.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns a B1 rating to Telx's Term Loan Expansion
250 Greenwich Street
New York, NY 10007
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