Rating Action: Moody’s assigns B1 to Rackspace’s new term loan
Global Credit Research – 26 Jan 2021
New York, January 26, 2021 — Moody’s Investors Service (Moody’s) has assigned a B1 rating to Rackspace Technology Global, Inc.’s (Rackspace) proposed $2.2 billion seven-year senior secured term loan B. The net proceeds from the proposed term loan issuance will be used in conjunction with other secured debt to fully refinance the company’s existing $2.8 billion term loan B due 2023. All other ratings including the company’s B2 corporate family rating (CFR) and stable outlook are unchanged.
Assignments:
..Issuer: Rackspace Technology Global, Inc.
….Senior Secured Bank Credit Facility, Assigned B1 (LGD3)
RATINGS RATIONALE
Rackspace’s B2 CFR reflects its high but moderately decreasing leverage, intensely competitive end markets which include large multi-national providers and risks to sustainability of business model evolution despite turnaround evidence and solid growth over recent quarters. The rating is also constrained by the technological and competitive threats inherent in the IT services industry. The rating is supported by Rackspace’s moderate scale and strengthening free cash flow profile driven by recurring revenue and recent double-digit bookings growth trends. Rackspace’s asset-light multicloud services focus has sustained lower capital intensity. Moody’s expects Rackspace’s free cash flow to steadily improve in 2021 and 2022, aided by expectations for mid-to-high single-digit revenue growth and lower interest expense associated with reduced debt and refinancing activity following its August 2020 IPO. Rackspace’s debt leverage (Moody’s adjusted) for the last 12 months ending September 30, 2020 was 5.6x.
Rackspace’s liquidity is very good, supported by a pro forma cash balance of about $158 million as of September 30, 2020, reflecting November 2020 financing activity, and full availability under a $375 million revolving credit facility. Moody’s anticipates the company will rely on its cash balances and utilize its revolver to invest in its business, including targeted M&A to enhance its service offerings similar to the company’s November 2019 acquisition of Onica Holdings LLC (Onica). Onica is an Amazon Web Services consulting partner and managed services provider providing cloud-native consulting and managed services, including strategic advisory, architecture and engineering and application development services. Onica has increased Rackspace’s service innovation and facilitated expanded customer penetration, and likely serves as a template for future M&A to better leverage global growth opportunities in the multicloud space.
The debt instrument ratings of Rackspace reflect the probability of default of the company, as reflected in the B2-PD probability of default rating, an average expected family recovery rate of 50% at default given the mix of secured and unsecured debt in the capital structure, and the loss given default (LGD) assessment of the debt instruments in the capital structure based on a priority of claims. The company’s senior secured term loan and revolving credit facility are rated B1 (LGD3), one notch above the B2 CFR, given the loss absorption provided by the unsecured notes. The unsecured notes are rated Caa1 (LGD6), two notches below the B2 CFR due to their junior position in the capital structure.
The stable outlook reflects Rackspace’s reduced leverage following its August 2020 IPO and strong bookings trends and revenue growth. Moody’s expectations for continued increases in the scale and profitability of the company’s multicloud services segment will contribute to continued reductions in leverage, further supporting the stable outlook.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody’s could upgrade Rackspace’s ratings if leverage is sustained below 4.5x and free cash flow/debt is greater than 5% (both on a Moody’s adjusted basis).
Moody’s could downgrade Rackspace’s ratings if leverage is sustained above 5.5x (Moody’s adjusted) or if free cash flow deteriorates or if liquidity deteriorates. In addition, the rating could be downgraded if the company returns cash to shareholders or if there is deterioration of Rackspace’s market position irrespective of its credit metrics.
The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1076924. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Based in San Antonio, Texas, Rackspace combines its broad IT industry expertise with leading technologies across applications, data and security to deliver end-to-end multicloud solutions. The company’s 120,000-plus customer base is accessed through a network presence in more than 60 markets around the world.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.
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Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Neil Mack, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Lenny J. Ajzenman Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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