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Global Credit Research - 21 Oct 2010
New York, October 21, 2010 -- Moody's Investors Service upgraded SoftLayer Technologies, Inc.'s
("SoftLayer") Corporate Family Rating (CFR) to B1 from B2
and Probability of Default Rating (PDR) to B2 from B3 due to the expected
improvement in the leverage and liquidity profile of the company following
its merger with ThePlanet.com Internet Services, Inc.
(ThePlanet.com). As part of the rating action, Moody's
assigned a B1 LGD3-30% rating to the company's senior
secured credit facilities, consisting of a $255 million term
loan and a $20 million revolving credit facility. SoftLayer
intends to use proceeds from the term loan to fund the cash portion of
the acquisition and to repay outstanding debt at both companies.
Moody's will withdraw the ratings on SoftLayer's existing
term loan upon successful completion of the pending transaction and refinancing.
The rating outlook is stable.
The following is a list of today's rating actions and Moody's ratings:
..Issuer: SoftLayer Technologies, Inc.
.$20 million Secured Revolving Credit Facility,
Assigned B1 (LGD3 -30%)
.$255 million Senior Secured Term Loan, Assigned
B1 (LGD3 -30%)
.....Corporate Family Rating,
Upgraded to B1 from B2
.....Probability of Default Rating,
Upgraded to B2 from B3
SoftLayer's B1 CFR largely reflects the company's modest leverage
following its merger with ThePlanet.com and expected positive combined
free cash flow generation. Moody's believes that the addition
of ThePlanet.com's revenue and cash flow base, including
the real estate footprint in the combined data center facilities,
should allow SoftLayer to meet its growth objectives through internally
generated cash flows. Moody's expects the company to operate
under a 3.0x Debt/EBITDA (Moody's adjusted, primarily for
capitalized operating leases) range. The ratings are also supported
by SoftLayer's strong and consistent growth from providing hosting and
managed services to Internet-centric SMBs since its inception,
and high EBITDA margins that can translate into positive free cash flow
once the company emerges from its growth phase.
However, the ratings are somewhat prospective, as Moody's
remains concerned about the longer term sustainability of that cash flow
stream (as the potential commoditization of the various data center services
may lead to price competition), challenges associated with solidifying
a defensible competitive position in the fragmented hosting segment of
the data center services industry, and the company's modest scale
and short operating history. In our view, as competition
evolves, SoftLayer's lack of customer contracts, currently
an anomaly in the data center services industry, also constrains
the rating. In addition, ratings are constrained by the upcoming
challenge for the management team to integrate the relatively underperforming
operations of ThePlanet.com.
Moody's expects SoftLayer to have ample liquidity over the next
twelve months, as proforma for the proposed credit facilities the
company will have about $20 million of cash on hand and access
to a $20 million revolving credit facility to backstop potential
free cash flow deficits that may arise if the company expands its plans
to add server capacity in new data centers. Moody's projects
the combined company to be free cash flow positive for the next four quarters,
as both predecessor entities have already prefunded facility expansion
and systems upgrades in 2010. However, SoftLayer's
liquidity may eventually face pressure due to the company's need
to continue to invest in new and replacement server capacity.
The ratings for the debt instruments reflect both the overall probability
of default for SoftLayer, to which Moody's has assigned a B2 PDR,
and a below-average mean family loss given default assessment of
35% (or an above-average mean family recovery estimate of
65%), in line with Moody's LGD Methodology and typical treatment
for an all-first-lien senior secured debt capital structure.
The term loan is secured by a first priority interest in and lien on substantially
all SoftLayer assets. The term loan, which comprises the
bulk of the company's debt capital structure, is rated B1 (LGD3-30%),
in line with the CFR. This rating is one notch lower than the LGD
methodology-implied rating suggested by the modeling template as
it falls just over the cusp of a Ba3 rating on an unadjusted basis.
The rating committee override more appropriately reflects the perceived
collateral coverage of these debt obligations relative to the overall
waterfall of debt and other non-debt claims, and Moody's
expectation that future incremental financing activity would be more likely
to occur at the already existing senior secured (first lien) level,
thereby raising the future expected loss estimate and re-positioning
the rating more comfortably with the idealized loss rate range for B1-equivalent
The stable outlook reflects Moody's expectation that SoftLayer will
continue to capitalize on strong demand for server capacity by Internet--centric
SMB's over the medium-term and that the company will manage
its growth within available liquidity.
WHAT COULD CHANGE THE RATING--UP
An upgrade is not likely over the near term as the company's small
size constrains the rating, particularly as it navigates the still
early phases of its lifecycle and works on integrating ThePlanet.com.
However, once the above concerns are better mitigated, upward
rating momentum could develop if SoftLayer successfully ramps up server
utilization in its newly leased facilities, such that adjusted Debt/EBITDA
leverage trends below 2.0x on a sustainable basis and the company
generates consistent positive free cash flow in excess of 10% of
WHAT COULD CHANGE THE RATING--DOWN
Negative rating pressure could ensue if the company's liquidity
becomes strained or leverage increases either due to the company's
inability to integrate ThePlanet.com or as it adds new servers
during its expansion, or thereafter, as the company must continue
to replace existing capacity, and if adjusted leverage rises above
3.0x on a sustained basis.
The principal methodologies used in rating SoftLayer Technologies,
Inc. were Global Telecommunications Industry 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, and Probability of Default Ratings
and Loss Given Default Assessments published in June 2009. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
SoftLayer Technologies, Inc. is a US-based provider
of dedicated hosting and managed data center services. The company's
headquarters are located in Dallas, TX.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
confidential and proprietary Moody's Investors Service's information,
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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades SoftLayer ratings (CFR and Bank Debt to B1) on merger with ThePlanet.com.
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