S&P Downgrades Rackspace (RAX) to 'BB-'; Outlook is Stable

October 12, 2016 4:04 PM EDT

Get access to the best calls on Wall Street with StreetInsider.com's Ratings Insider Elite. Get your Free Trial here.

S&P Global Ratings today said it lowered its corporate credit rating on San Antonio, Texas-based Rackspace Hosting Inc. (NYSE: RAX) to 'BB-' from 'BB+' and removed it from CreditWatch, where we had placed it with negative implications on Aug. 26, 2016 following the announcement of the acquisition. The outlook is stable.

At the same time, we assigned a 'BB+' issue-level rating and '1' recovery rating to the company's proposed senior secured credit facilities, which include a $225 million revolving credit facility and $2 billion term loan. The '1' recovery rating indicates our expectation for very high (90%-100%) recovery for lenders in the event of a payment default.

We also assigned a 'B+' issue-level rating and '5' recovery rating to the company's proposed $1.18 billion senior unsecured notes. The '5' recovery rating indicates our expectation for modest (10%-30%, lower half of the range) recovery for lenders in the event of a payment default.

The borrower of the debt will initially be Inception Merger Sub Inc., the acquiring entity. Following the transaction, Inception Merger Sub Inc. will merge into Rackspace Hosting Inc., which will continue as the surviving entity and borrower of the debt.

We will withdraw the ratings on Rackspace's existing debt, which will be redeemed as part of the acquisition, when it has been repaid.

"The ratings downgrade reflects the acquisition of the company by Apollo Global Management LLC in a leveraged buyout, which will cause leverage to increase materially," said S&P Global Ratings credit analyst Rose Askinazi.

We now expect adjusted leverage to be between 4x-5x over the next few years, relative to our previous expectation that adjusted leverage would remain between 1x-2x. Despite higher leverage, we expect the company will continue to generate good levels of free operating cash flow.

The stable outlook reflects our expectation that adjusted leverage will remain between 4x-5x through 2017, with continued healthy revenue growth and fairly stable EBITDA margins.



Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In






Related Categories

Credit Ratings

Related Entities

Standard & Poor's, Definitive Agreement

Add Your Comment