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Announcement:

Moody's assigns a B1 rating to Telx's Term Loan Expansion

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 credit facility.

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 quarters.

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 facilities.

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.

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
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns a B1 rating to Telx's Term Loan Expansion
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