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Global Credit Research - 31 Mar 2011
London, 31 March 2011 -- Moody's Investors Service has today assigned to Global Switch Holdings
Limited ("Global Switch", "the company")
a provisional (P)Baa3 long-term issuer rating and a provisional
(P)Baa3 rating to a proposed EUR500 million senior unsecured bond.
The outlook for all assigned ratings is stable. This is the first
time Moody's has rated Global Switch, a real estate operating
company that owns, acquires, manages and develops data centres
with six in Europe, two in Asia Pacific and a ninth under construction
in Paris. The company's carrier-neutral data centres
offer wholesale, multi-tenanted space on medium- to
long-term leases. Global Switch is wholly owned by Aldersgate
Investment, an unlisted investment vehicle owned by the Reuben brothers.
Moody's issues provisional ratings in advance of the final closing of
a transaction or the sale of securities and these ratings reflect Moody's
preliminary credit opinion only. Upon a conclusive review of the
final documentation of the bonds and bank facilities and the successful
closing of Global Switch's refinancing, Moody's will endeavour
to assign definitive ratings. A definitive rating may differ from
a provisional rating.
The issuer rating has been assigned on a provisional basis and will be
finalized upon (i) receipt of interim reviewed accounts as at 31 December
2010 and these not being materially different from those previously received
from the company; and (ii) confirmation that any outstanding shareholder
loans post-refinancing were converted into common equity.
The bond rating is also provisional, based on a senior unsecured
ranking (and pending confirmation of no secured debt in the group and
no encumbered assets), guaranteed by material subsidiaries (effectively
the same subsidiaries guaranteeing the company's bank facility),
and will be finalized subject to receipt of the final documentation and
it not being materially different from the drafts we have reviewed in
assigning the provisional rating.
The key strengths that support the (P)Baa3 rating with stable outlook
are Global Switch's solid recurring income generated from long-term
leases with high occupancy rates of around 93% and a very low tenant
churn rate of less than 1% during the calendar year 2010.
Furthermore, in Moody's view, the growth in demand for
data centre space is likely to continue to exceed growth in supply in
the short- to medium-term, thereby supporting rental
growth and continued low vacancy rates. The rating is also supported
by the company's moderate leverage, as measured by net debt/EBITDA
and good fixed charge coverage, measured by EBITDA/gross interest
expense + ground rents (note all data is subject to Moody's
standard accounting adjustments) that are forecast on a pro-forma
basis at FYE 31 March 2011 to be 2.1x and 4.4x respectively.
In addition, Global Switch benefits from an adequate liquidity risk
profile. The first debt maturity does not occur before 2014 and
headroom under its financial covenants is comfortable.
The rating is constrained by Global Switch's relatively small scale
compared to its global similarly-rated peer group and the company's
limited diversification by location with eight data centres in seven cities,
plus one under construction. In addition, revenues are concentrated
by tenant with the top ten tenants comprising 52% of annualized
rental income and the largest tenant 13%.
Data centres as a property type experienced significant overbuilding in
anticipation of demand from dot-com companies, followed by
a collapse in the early 2000s. Currently, strong demand from
financial services and corporate enterprises for electronic data storage
and online services coupled with a lack of data centre construction has
created favourable near-term market dynamics for Global Switch.
Moody's notes, however, that over the longer term there
is the potential for additional competition, as well as structural
and technological changes in the data marketplace, which are meaningful
credit concerns. The potential threat to the demand for data centre
space is likely to emerge from among Global Switch's tenants who
may choose to develop and operate their own data centres. Furthermore,
potential competition from new entrants, such as power companies;
existing players or large volume in-house users who decide to provide
space and services to third parties, could eventually shift under-supply.
Nevertheless, there are extensive barriers to entry as data centres
are highly capital intensive due to tenants' operational requirements.
The construction specifications for data centres include heavy load bearing,
fire retardation materials, capacity for peak power requirements,
efficient cooling systems, strict security control and system redundancy
requirements. However, given the high cost of these specialized
buildings, there is limited alternative use that would provide a
similar return on investment. Reliability is an important aspect
of this asset class and, positively, Global Switch's
management reports a strong track record for service reliability in line
with the industry standards for Tier 3 facilities, which supports
tenant demand for its data centres.
The stable rating outlook reflects Moody's expectation that no significant
change occurs in the competitive landscape for the foreseeable future
and that the lease-up of Global Switch's new facility in
Paris (currently under construction) will be in line with management's
forecast. The stable outlook also assumes that adjusted net debt/EBITDA
will remain around 3.0x or less, fixed charge cover remains
above 3.0x, the development pipeline does not exceed 10%
of gross assets, assets remain unencumbered and an adequate liquidity
profile is maintained at all times.
The company's relatively small scale compared to its global similarly-rated
peer group and limited diversification are constraining factors on the
rating. Positive pressure on the rating could arise if the company
grows larger and more diverse, with the market and tenant concentrations
comprising less than 15% and 10% of GLA (gross lettable
area) or revenues respectively, while maintaining its currently
high occupancy rates and credit metrics. Conversely, a sustained
deterioration of financial metrics with inter alia leverage rising above
3.5x or fixed charge cover falling below 3.0x, a sharp
increase in development activity or an inadequate liquidity profile could
be negative for the rating.
The principal methodology used in rating Global Switch was Moody's
"Global Methodology for REITs and Other Commercial Property Firms",
published July 2010. Other methodologies and factors that may have
been considered in the process of rating these issuers can also be found
on Moody's website.
Global Switch, incorporated in the British Virgin Islands with its
corporate offices located in London, reported at fiscal year-ending
31 March 2010 total revenues of GBP221 million and total assets of GBP2.55
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
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
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Please see the ratings disclosure page on our website www.moodys.com
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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.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
Moody's assigns first-time (P)Baa3 issuer rating to Global Switch
One Canada Square
London E14 5FA
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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