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Fitch Rates Equinix's Benchmark-Size Senior Unsecured Notes 'BB'
March 7, 2017 / 9:22 PM / 9 months ago

Fitch Rates Equinix's Benchmark-Size Senior Unsecured Notes 'BB'

(The following statement was released by the rating agency) CHICAGO, March 07 (Fitch) Fitch Ratings has assigned a 'BB/RR4' rating to Equinix, Inc.'s proposed issuance of benchmark-size senior unsecured notes with anticipated maturity of 10 years. Together with the EUR1 billion term loan issued on Jan. 6, 2017, and anticipated equity issuance, Equinix will use the proceeds to fund the previously announced $3.6 billion acquisition of data centers from Verizon. Equinix's Long-Term Issuer Default Rating (IDR) is 'BB' with a Stable Outlook. A complete list of current ratings follows at the end of this release. Fitch's rating actions affect approximately $10.5 billion of total debt, including the $1.5 billion undrawn revolving credit facility (RCF) and $1.5 billion of capital leases. Fitch's rating and Stable Outlook consider in large part the successful completion of a $1.75 billion common stock offering to fully fund the Verizon data centers acquisition that is expected to close by mid-2017, and that Equinix's leverage pro forma for the acquisition financing will remain within the expectations of the current 'BB' IDR. Equinix projects the acquired assets to generate $450 million in revenues in the first 12 months, and $270 million in EBITDA, implying EBITDA margin of 60%, above the current 45%. The higher margin reflects the maturity and higher utilization of the Verizon data centers and exclusion of G&A expenses from the acquisition. The acquisition would increase the following in Equinix Americas' operating profile: --Revenues by 26%; --EBITDA by 33%; --Number of IBXs by 53%; --Gross capacity (square feet) by 42%; --Verizon's portfolio of 900 customers in the acquired facilities; --Business relationships in government and energy sectors. Key concerns for the acquisition include: Elevated leverage on a near-term basis post-acquisition. Fitch anticipates Equinix to grow its EBITDA in 2017 and 2018, and adjusted leverage to decline to near 4.0x within the 12 to 18 months following the acquisition. The ratings and Outlook are supported by Equinix's leading market position and world-class reputation in data center colocation, geographically diverse and network-dense footprint, central position in the emerging hybrid cloud ecosystem, secular demand drivers for data center outsourcing, recurring revenue and stable customer base. Rating constraints include negative free cash flow resulting from capital intensity and required REIT dividends, modest expected deleveraging over the rating horizon, debt-funded acquisitions, competitive nature of the data center industry and low unencumbered asset coverage. KEY RATING DRIVERS Rating strengths include: --Scale, network density and reputation as a world-class premium colocation provider; --Increasing interconnection revenue mix is the positive driver for growth, profitability, and retention; --Stable business model highlighted by over 90% recurring revenue and churn consistently in the 2.0-2.5% range; --Low customer concentration - the company's largest and top 10 customers account for 3.1% and 16.9% of total revenue, respectively. Rating concerns include: --Capital intensity from the high cost of building new capacity; Fitch expects capital intensity in the mid-20% range over the rating horizon; --Required REIT dividends constrain FCF and limit ability to delever outside of EBITDA growth; --Low unencumbered asset coverage due mainly to the company leasing the majority of its square footage. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Organic revenue growth of about 10% to 11% over the rating horizon excluding the Verizon acquisition; Fitch assumes contribution from the acquisition to start after mid-2017 with normalized growth rate of 3% as they are operating at a higher utilization rate; --Fitch assumes the higher EBITDA margin from the acquired assets to provide a one-time enhancement to Equinix's operating profile, and normalize thereafter; --Recurring capex to scale with the higher revenue forecast at 4% of revenue; expansion capex of $50,000 per cabinet addition. Capex/revenue ratio in the mid-20% range over the rating horizon; --Dividend payout ratio of approximately 45% to 50% of AFFO; --FCF negative over the rating horizon; deficit financed through revolver draws; --Balanced financing between equity and debt to fund the balance of Verizon data center acquisition. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a negative rating action include: --Debt-financed acquisitions that increase leverage or dilute margins; financial impact will be considered in context of strategic rationale; --Fitch's expectation of leverage (rent-adjusted) sustaining above 5.0x; or secured leverage sustaining above 3.0x; --Increased liquidity risk, potentially resulting from limited revolver availability as debt maturities approach. Future developments that may, individually or collectively, lead to a positive rating action include: --Fitch's expectation of leverage (rent-adjusted) sustaining below 4.0x; --Unencumbered asset coverage of about 2.0x; --Consistent positive free cash flow generation, but still allowing for sufficient capital investment to maintain market leadership and premium offering. LIQUIDITY Fitch believes that negative FCF over the rating horizon will cause Equinix to rely heavily on external funding to support its liquidity needs. As of Dec. 31, 2016, the company had $1.45 billion available under its $1.5 billion revolver ($50.5 million LOCs and $0 drawn). Required REIT dividend distributions will make it difficult for Equinix to add meaningfully to its cash balance ($752 million of cash, cash equivalents and short-term investments as of Dec. 31, 2016). Fitch expects that Equinix will limit its revolver borrowings by raising new debt within the next few years. Failure to do so may result in heightened liquidity risk as debt maturities approach, and may result in a negative rating action. While other REITs can often leverage unencumbered assets to address liquidity needs, Equinix's data centers are mostly leased, limiting sources of contingent liquidity. Its owned facilities, however, are mainly in top global markets, which should imply a lower capitalization rate in a sale or financing. Excluding Verizon, Fitch estimates unencumbered asset coverage of unsecured debt of about 1.2x, assuming a 25% discount to company-owned net operating income (NOI) to account for ground leases on eight of its 31 owned facilities (Equinix does not disclose NOI by facility). This figure is subject to change, however, once there is more clarity around pro forma owned asset composition and associated NOI. Equinix's ability to leverage owned facilities may be limited by the availability of mortgage capital for data centers, which is not as deep compared with other commercial real estate property types. Fitch believes Equinix's strong business and operating profile characteristics described above provide key offsets to this risk. Fitch currently rates Equinix as follow: Equinix, Inc. --Long-Term IDR 'BB'; Outlook Stable; --$1.500 billion senior secured RCF 'BBB-/RR1'; --Senior secured Term Loan A 'BBB-/RR1'; --Senior secured Term Loan B 'BBB-/RR1'; --$3,850 million of unsecured senior notes due 2020-2026 'BB/RR4'. Fitch rates the following: --New benchmark-size unsecured senior notes at 'BB/RR4'. The Rating Outlook is Stable. Contact: Primary Analyst Alen Lin Senior Director +1-312-368-5471 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson David Peterson Senior Director +1-312-368-3177 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Date of Relevant Rating Committee: Dec. 8, 2016 Summary of Financial Statement Adjustments - No material financial adjustments have been made. 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