Rackspace (RAX) Ratings Placed Under Review for Downgrade by Moody's Amid M&A Deal

August 29, 2016 10:55 AM EDT

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Moody's Investors Service, ("Moody's") has placed Rackspace Hosting, Inc. (NYSE: RAX) (Rackspace or the company) ratings under review for downgrade, including the company's Ba1 corporate family rating (CFR), Ba1-PD probability of default rating (PDR), and Ba1 senior unsecured rating. The review was prompted by the announcement of Apollo Global Management's planned $4.3 billion, all cash acquisition of the company. In order to finance the buyout, we expect leverage will rise, putting downward pressure on Rackspace's credit profile.

..Issuer: Rackspace Hosting, Inc.

On Review for Downgrade:

.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba1-PD

.... Corporate Family Rating, Placed on Review for Downgrade, currently Ba1

....Senior Unsecured Regular Bond/Debenture due 2024, Placed on Review for Downgrade, currently Ba1 (LGD4)


Speculative Grade Liquidity Rating. unchaged at SGL-1

Outlook Actions:

....Outlook, Changed To Rating Under Review From Stable


Rackspace's Ba1 CFR reflects its low leverage, conservative financial policy and strong free cash flow driven by stable recurring revenues and steady EBITDA margins. The company has a proven track record of organic revenue growth, with quarterly sequential revenue growth throughout the last five years. In contrast to most IT infrastructure companies of its size, Rackspace has organically built a highly profitable business within a dynamic, capital intensive and rapidly growing industry. Its cost structure is mostly variable, which has allowed margins to remain very consistent despite the company's high growth. Growth via acquisition remains an option for the company but is not a key component of the Rackspace business model. The rating is constrained by Rackspace's relatively small scale in an industry dominated by large and well capitalized companies and the technological and competitive threats inherent in the IT services industry.

The principal methodology used in these ratings was Global Communications Infrastructure Rating Methodology published in June 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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