S&P Upgrades Iron Mountain (IRM) to 'BB-'; Outlook Remains Stable

S&P Global Ratings said that it raised its corporate credit rating on Iron Mountain Inc. (NYSE: IRM) to 'BB-' from 'B+'. The rating outlook is stable.

At the same time, we raised our issue-level ratings on the company and its subsidiaries' debt by one-notch, in line with the corporate credit rating. The recovery ratings remain unchanged.

"The upgrade reflects our expectation that Iron Mountain's acquisition of Recall Holdings Ltd. (unrated) will improve the company's scale and geographic diversification," said S&P Global Ratings credit analyst Jawad Hussain. "The acquisition will reduce Iron Mountain's exposure to the more mature North American market and increase its presence in faster growing international markets." Pro forma for the acquisition, North America will represent about 60% of the company's revenues, down from 70%, and international markets will represent 40%, up from 30%.

Our corporate credit rating on Iron Mountain also reflects our expectation that the acquisition will result in significant synergies realized over the next two to three years. These synergies should lead to improved operating margins and lower lease-adjusted leverage, which we expect to decline to the low-5x area by 2017 and to below 5x by 2018 from the current mid-5x area.

We revised our assessment of Iron Mountain's business risk profile to satisfactory from fair. The revision is based on our assessment that the Recall acquisition will increase Iron Mountain's exposure to faster growing international markets and will result in substantial synergies that should drive an expansion of operating margins.

The stable rating outlook reflects our expectation that Iron Mountain will be able to leverage its increased size, scale, and geographic diversification to generate low- to mid-single-digit organic revenue growth while improving its operating margins. We also expect lease-adjusted leverage to moderate to the low-5x area by 2017 and to below 5x by 2018 as the company realizes full synergy benefits from the Recall acquisition over the next few years.

We could lower our corporate credit rating on Iron Mountain if the company isn't able to successfully integrate the Recall assets and, as a result, it isn't able to fully realize the cost efficiencies and benefits of its increased size and scale. This would likely result in weaker-than-expected operating performance and lease-adjusted leverage remaining in the mid-5x area by the end of 2017. Additionally, we could lower the rating if the company undertakes any future sizeable debt-financed acquisitions that would result in leverage remaining above 5x beyond 2018.

We view an upgrade as unlikely given the company's status as a real estate investment trust, which reduces its financial flexibility. An upgrade would incorporate indications that Iron Mountain's financial policy will become less aggressive and likely entail the issuance of equity reduces lease-adjusted leverage toward the 4x area.

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