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Fitch Affirms Global Switch at 'BBB+'; Outlook Stable
June 6, 2017 / 5:45 PM / 3 months ago

Fitch Affirms Global Switch at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 06 (Fitch) Fitch Ratings has affirmed data centre owner Global Switch Holdings Ltd.'s (Global Switch) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The Short-Term IDR has also been affirmed at 'F2'. Fitch has also affirmed the senior unsecured rating of Global Switch Property (Australia) Pty Limited, a wholly-owned subsidiary, at 'BBB+'. The Outlook is Stable. Global Switch's cash flow continues to be resilient, driven by a geographically diverse portfolio of large-scale data centres that generate stable, contractual rental income. The company maintains a conservative capital structure with net debt/EBITDA below 4x at 31 December 2016, although owing to substantial development, we forecast this to increase to around 5x by 2018, before falling back below 4x. On 1 June 2017, Global Switch issued EUR500 million of 1.5% notes due January 2024 and EUR500 million of 2.25% notes due May 2027 to fund development, refinance bonds due in 2018 and lower the cost of debt. KEY RATING DRIVERS New Ownership Structure: The acquisition of 49% of Global Switch from Aldersgate Investments Ltd. by a consortium of Chinese investors in December 2016 is credit-neutral. Aldersgate Investments Ltd. retains 51%. The new shareholders should support portfolio diversification and development, particularly in accessing telecommunications and internet providers expanding outside of China. The company is now jointly controlled by the consortium's investment vehicle, Elegant Jubilee Limited, and Aldersgate. The shareholders have entered into a shareholders agreement that regulates operational and financial policies and defines a dividend policy, and have confirmed their support to maintain a strong investment-grade rating. Management remains unchanged. Decreasing Lease Length: At 31 December 2016, the average remaining lease maturity of the top 20 customers decreased to a short 4.1 years compared with 4.3 the year before. Nevertheless, developments coming on line will increase the average lease maturity to five years, retention rates have historically been very high and developments have a high percentage of pre-lets. Global Switch, which holds a joint marketing agreement with Chinese data centre operator Daily-Tech, recently signed significant new contracts in Hong Kong and Singapore with Daily-Tech, with China Telecom Global as the end customer in Hong Kong. Development to Support Growth: Global Switch is developing or expanding sites in Amsterdam, Frankfurt, London, Sydney, Singapore and Hong Kong at an estimated total cost of over GBP900 million over the next three years (GBP180 million is already committed). The company mitigates construction risk by requiring high pre-commitments before beginning construction, staging and phasing the build schedule to meet revenue generation, passing design and construction risks to contractors and obtaining protections such as bank and parent company guarantees, liquidated damages in case of delays, and step-in rights in the case of end customers. Temporarily Increasing Leverage: Global Switch's net debt/EBITDA of below 4x at end-2016 and loan-to-value (LTV) of around 20% compare favourably with Fitch-rated investment grade real estate peers, whose metrics average 8x net debt/EBITDA and 40% LTV. Low debt levels mitigate the slightly higher operating risk of Global Switch compared with other similarly rated commercial real estate companies. The company's closest rated peer is Digital Realty Trust, Inc. (BBB/Stable), a larger, US-focused data centre company, but with leverage typically at around 5.0x. Portfolio of Prime Data Centres: Global Switch's portfolio comprises 10 high-specification, large-scale, carrier and cloud-neutral, multi-tenanted data centres, which are valued at GBP4.95 billion and located near key business and telecommunication hubs across seven European and Asian countries. The assets benefit from uninterruptible power supplies, high security, and resilient cooling systems and have a strong operating history. Fitch believes data centres should benefit from medium-term growth generated by increasing global internet traffic, higher bandwidth needs, outsourcing trends and the development of cloud computing. Tenant Concentration: Although Global Switch has approximately 1,200 contracts with over 350 tenants, the top 20 clients generate around two-thirds of rental income with the largest representing 10.7%. Most of the top 20 tenants, however, are investment-grade companies and over 80% of annualised lease revenue is derived from customers present in multiple Global Switch data centres. Niche Asset Class: The data centres are specialised properties operating in a niche sector with potential long-term technological obsolescence, but also with significant barriers to entry and favourable medium-term trends. While financial metrics are consistent with an 'A' category, Global Switch's ratings are constrained by data centre properties being a less mature asset class compared with other real estate assets, a rather illiquid trading market for the properties, and the potential for rapid technological development rendering the assets obsolete, although this is a relatively low, long-term risk. DERIVATION SUMMARY Global Switch generates resilient cash flows from a geographically diverse portfolio and maintains financial metrics consistent with the 'A' category. The capital structure is conservative with net debt/EBITDA of below 4x at 31 December 2016, although we forecast this to increase to around 5x by 2018, owing to funding for developments. Levels should return to under 4x by 2020. Global Switch has lower leverage and greater geographic diversity than most Fitch-rated real estate peers with similar ratings. Global Switch operates in a relatively new, niche market that features lower liquidity compared with other real estate sectors, limiting the ability to divest properties in a distressed scenario. The market carries long-term technological obsolescence risk. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Most expiring leases are either renewed or replaced with new tenants leading to a flat occupancy ratio (excl. redevelopment); - Some developments and extensions driving top line-growth (mainly Hong Kong). RATING SENSITIVITIES Positive: Given the niche asset class Global Switch is operating in, Fitch currently views an upgrade as unlikely. Negative: Future events that may, individually or collectively, lead to negative rating action include: -Aggressive committed development capex, beyond the current pipeline, not covered by existing liquidity; -Significant deterioration of the average lease length or vacancies or renewals/new leases made at large discounts; -EBITDA net interest cover below 3.5x (2015: 4.9x) on a sustained basis; -Leverage above 4.5x net debt/EBITDA on a sustained basis; -A material increase in secured debt at the expense of unsecured bond holders. LIQUIDITY Global Switch has solid liquidity with no short-term refinancing pressure. In February, the company signed a new GBP425 million facility and on 1 June 2017 raised EUR1 billion of long-dated bonds through its EMTN programme. Proceeds from the bonds will largely fund new development capital expenditure and repay EUR600 million unsecured notes due in April 2018. Contact: Principal Analyst Jean-Baptiste Bouillaguet Associate Director +44 20 3530 1606 Supervisory Analyst Bram Cartmell Senior Director +44 20 3530 1874 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Paul Lund Senior Director +44 203 530 1244 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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