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Related Issuers
Rating Action:

Moody's downgrades Cyxtera's CFR to Caa1; outlook changed to negative

13 Apr 2020

New York, April 13, 2020 -- Moody's Investors Service (Moody's) downgraded Cyxtera DC Holdings, Inc.'s (Cyxtera) corporate family rating (CFR) to Caa1 from B2 and its probability of default rating to Caa1-PD from B2-PD. Cyxtera's senior secured first lien credit facility, consisting of a $915 million term loan and a $150 million revolver, was downgraded to B3 from B1 and a $310 million senior secured second lien term loan was downgraded to Caa2 from Caa1. These downgrades are the result of weaker than expected revenue and EBITDA growth, weak margins, limited evidence of sustained improvement in bookings and churn trends, growing cash flow deficits, weakening liquidity and Moody's expectations for continued elevated leverage (Moody's adjusted).

The outlook change to negative from stable reflects Moody's view of Cyxtera's continuing execution risks associated with delivering sustainable EBITDA growth, driving debt leverage (Moody's adjusted) lower, and reducing rising cash flow deficits.

Downgrades:

..Issuer: Cyxtera DC Holdings, Inc.

.... Probability of Default Rating, Downgraded to Caa1-PD from B2-PD

.... Corporate Family Rating, Downgraded to Caa1 from B2

....Senior Secured First Lien Bank Credit Facility, Downgraded to B3 (LGD3) from B1 (LGD3)

....Senior Secured Second Lien Bank Credit Facility, Downgraded to Caa2 (LGD5) from Caa1 (LGD5)

Outlook Actions:

..Issuer: Cyxtera DC Holdings, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Cyxtera's Caa1 CFR reflects governance risks, specifically the likelihood that leverage (Moody's adjusted) will remain elevated for the next two years given the aggressive financial policy of the company's private equity owners and the potential for distressed debt exchanges given persistently high leverage and a weakening liquidity position. Despite its position as the second largest global independent data center operator offering retail colocation and interconnection services, Cyxtera has faced persistent difficulties growing revenue and EBITDA since its 2017 carveout from CenturyLink, Inc. (CenturyLink, Ba3 stable). The company's credit profile also reflects execution difficulties as a standalone entity, weaker than expected bookings growth and churn mitigation, significant industry risks, intensifying competition and the high capital intensity required to drive stronger top line growth. Despite relatively low capacity utilization across Cyxtera's aggregated facilities, demand from specific markets hasn't necessarily aligned with such availability and has resulted in high capital spending since the 2017 carveout which has persistently delayed deleveraging. Improved productivity from the company's revamped and now regionally-focused sales force is necessary to better tie revenue growth to success-based capital investing in underutilized facilities.

Moody's expects Cyxtera will continue to generate meaningfully negative free cash flow in 2020. Without substantial success from likely liquidity initiatives and sustainable EBITDA growth traction, Moody's expects Cyxtera will face increasing liquidity difficulties by early 2021, and will be heavily reliant on its revolver which matures in May 2022. These factors are offset by Cyxtera's relatively stable base of contracted recurring core revenue, strong network footprint in Tier 1 markets, the company's concerted efforts to reduce operating costs begun in 2019 and continuing in 2020, owned data center assets that can be monetized, and secular growth trends for data center services globally.

The communications infrastructure industry is expected to be more resilient than many sectors as the coronavirus outbreak has widened and the global economic outlook deteriorates. Moody's does not anticipate reduced colocation demand initially as a result of a weakening US economy. Cyxtera could see payment delinquencies from smaller customers over time if any economic downturn is prolonged. Moody's expects no supply chain disruptions in the short term for the industry, but second half 2020 supply shortages of certain equipment and infrastructure necessary for capacity expansions could result from an elongated economic shock. Moody's will take rating actions as warranted to reflect the breadth and severity of the shock as it unfolds and potentially negatively impacts Cyxtera's credit quality.

The negative outlook reflects the risk that Cyxtera may not be able to sustainably improve weak revenue and EBITDA trends and reduce rising cash flow deficits. Cyxtera's credit metrics will remain under pressure over the next 12-18 months given limited traction on bookings and churn improvement, high debt leverage and constrained liquidity.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:

Moody's could lower Cyxtera's ratings further if the company's operating performance does not improve, its liquidity deteriorates, if it pursues distressed debt exchanges or if capital spending is reduced below a level necessary to support revenue growth. Moody's could upgrade Cyxtera's ratings if debt/EBITDA (Moody's adjusted) approaches 7.0x and free cash flow/debt (Moody's adjusted) was positive, both on a sustained basis. Moody's could stabilize Cyxtera's outlook if the company improves its weak operating trends and sustains steady deleveraging.

The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1076924. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Coral Gables, FL, Cyxtera consists of 62 carrier-neutral data centers providing colocation services across 3 continents to over 2,300 customers diversified across industries.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued [with/with no] amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Neil Mack, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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