S&P Places Rackspace (RAX) Ratings on CreditWatch Negative

August 26, 2016 2:15 PM EDT

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S&P Global Ratings said it placed its 'BB+' corporate credit rating on Rackspace Hosting Inc. (NYSE: RAX) on CreditWatch with negative implications.

At the same time, we placed our 'BB+' issue-level rating on the company's senior unsecured notes and senior unsecured revolving credit facility on CreditWatch with negative implications. If the existing debt remains part of the company's capital structure, we would lower the issue-level rating to reflect the lower expected corporate credit rating. In the event the existing debt is repaid, we would not lower the issue-level rating on this debt, and would withdraw the rating following the completion of the repayment. The '3' recovery rating on this debt is unchanged at this time and indicates our expectation for meaningful (50%-70%; upper half of the range) recovery in the event of a payment default.

"The CreditWatch listing reflects the likelihood of a multiple-notch downgrade of Rackspace following its agreement to be acquired by private-equity firm Apollo Global Management LLC," said S&P Global Ratings credit analyst Rose Askinazi.

While financing terms have not been disclosed, we expect the company to pursue additional debt financing that would push leverage above our current 3x downgrade threshold. Also, upon completion of the transaction, Rackspace will be controlled by a financial sponsor that may extract cash or otherwise increase leverage over time.

We intend to resolve the CreditWatch placement over the coming months as information becomes available about the company's proposed capital structure, financial policy, and strategic direction. We believe a two or three notch downgrade is likely given our expectation that the company's financial leverage will increase as a result of the proposed transaction. Given the shareholder and regulatory process, the deal is expected to close in the fourth quarter of 2016.

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