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Fitch Rates Equinix's EUR1B Notes 'BB'
December 5, 2017 / 3:20 AM / 9 days ago

Fitch Rates Equinix's EUR1B Notes 'BB'

(The following statement was released by the rating agency) CHICAGO, December 04 (Fitch) Fitch Ratings has assigned a 'BB'/'RR4' rating to Equinix, Inc.'s issuance of EUR1.0 billion senior unsecured notes. Equinix will use the proceeds to repay its existing EUR1.0 billion term loan. Equinix will also refinance its remaining outstanding secured term loans with unsecured term loan A, and upsize its revolving credit facility to $2.0 billion, from $1.5 billion. Fitch expects the refinancing to be leverage neutral, as total debt outstanding remains unchanged. 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. Upon full repayment of existing term loan B, Fitch expects Equinix's debt structure will consist of all unsecured debt, excluding its capital leases. Fitch views this positively, as the structure would provide Equinix with additional financial flexibility with its upsized RCF and availability of secured credit capacity (subject to covenant restriction). The security for the term loan A will be released upon the full repayment of existing term loan B facilities; the credit facilities are expected to become unsecured. In addition, the term loan includes an automatic release of guarantors provision in the event that the company is rated investment grade. KEY RATING DRIVERS Global Data Center Operator: Fitch views Equinix's global network of data centers as a differentiator. During third-quarter 2017 (3Q17), multi-metro customers contributed to 84% of Equinix's recurring revenues. Following acquisitions in recent years, Equinix expanded its footprint to span five continents and 48 metropolitan areas. The large service area has also enabled Equinix to generate a substantial portion of its revenues from interconnections. As the company has grown in all major regions, Fitch expects lower event risk related to significantly debt-financed acquisitions that could place pressure on leverage or liquidity. Demand Growth and Stable Model: The global data center colocation market is expected to grow at a double-digit pace over the next several years. Consistent with the industry, Fitch estimates that approximately 95% of Equinix's revenue is recurring as customers generally enter into multi-year service contracts to minimize disruptions to networks. Fitch believes these factors provide for a high degree of predictability in Equinix's organic financial outlook. Low Customer Concentration: Equinix serves a diverse set of customers, effectively minimizing customer concentration risks while benefitting from secular industry growth. During 3Q17, its largest customer contributed 3.7% of total recurring revenues while the top-10 customers represented approximately 18% of recurring revenues. The diversity of industry verticals that Equinix serves further diversifies risks; the company has higher exposure to Cloud and IT Services and Network verticals with revenue contributions of 28% and 24%, respectively. Constrained FCF: Running a colocation data center company is inherently capital intensive as operators need to invest to expand capacity to meet market demand. In addition, Equinix, being classified as a REIT, is required to consistently pay dividends; approximately 43% of AFFO was paid out for fiscal 2016. Fitch expects these factors to limit the company's FCF in the near to medium term as industry growth remains robust. Equinix's capex intensity has ranged between 20%-30% of revenue in recent years as revenue growth remains strong; in the long term Fitch expects capex intensity to recede while growth may decelerate. DERIVATION SUMMARY 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. The company operates within the data center value chain that includes wholesalers such as Digital Realty Trust, colocation data centers, and managed IT services such as Rackspace Hosting. Equinix is primarily focused on the colocation data center segment. Rating constraints include negative FCF 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 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; --Fitch assumes stable EBITDA margins after the one-time enhancement to the operating profile from the Verizon acquisition; --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 with the deficit financed through revolver draws and incremental debt issuances. 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 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; --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 Sept. 30, 2017, the company had $1.44 billion available under its $1.5 billion revolver ($60 million LOCs and $0 drawn); the upsized RCF to $2.0 billion will provide additional liquidity for the company. Required REIT dividend distributions will make it difficult for Equinix to add meaningfully to its cash balance of $1.6 billion of cash, cash equivalents and short-term investments. Fitch expects that Equinix will limit its revolver borrowings by raising new debt ahead of debt maturities. 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. As of 3Q17, Equinix's owned assets generated approximately 43% of recurring revenue (62 of 190 data centers). 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 currently rates Equinix as follows: --Long-Term IDR 'BB'; Outlook Stable; --$1.5 billion senior secured RCF 'BBB-'/'RR1' --Senior secured Term Loan B 'BBB-'/'RR1'; --$5.8 billion unsecured senior notes due 2022-2027 'BB'/'RR4'. FULL LIST OF RATING ACTIONS Fitch has assigned the following ratings: Equinix, Inc. --EUR1.0 billion unsecured senior notes 'BB/RR4'. 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 Date of Relevant Rating Committee: Dec. 8, 2016 Summary of Financial Statement Adjustments - No material financial adjustments have been made. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective from 21 November 2016 to 16 June 2017 (pub. 21 Nov 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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