23 December 2014 – Moodys Global Credit Research
Approximately EUR600 million of rated debt affected
London, 23 December 2014 — Moody’s Investors Service has today upgraded both the senior unsecured long-term issuer rating and the senior unsecured bond rating of Global Switch Holdings Ltd to Baa2 from Baa3. The rating outlook is stable.
“The upgrade of Global Switch’s ratings reflects the company’s consistent track record since its initial rating in 2011 and our continued expectation of strong demand for its services,” says Maria Maslovsky, a Moody’s Assistant Vice President — Analyst and lead analyst for Global Switch. “Global Switch benefits from the irreplaceable locations and high occupancy of its assets. However, its strengths are offset by its relatively small size and resulting asset concentration and some limitations on transparency related to its private company status.”
The upgrade reflects Global Switch’s high quality portfolio of multi-tenant, carrier-neutral data centres situated in low-latency, network dense locations in seven global financial and business centres. Global Switch’s assets further benefit from high occupancy, long-term leases and significant security and operational redundancy features ensuring the ability to meet mission-critical requirements.
Global Switch is operating in a favourable market environment buoyed by growing internet traffic and bandwidth requirements, cloud computing, as well as business and regulatory requirements for security/resilience. Combined with these strong demand drivers, the data centre industry is highly capital intensive and requires a material degree of technical knowledge in addition to real estate expertise, thus creating meaningful barriers to entry. In addition, owing to the sensitivity of tenants to potential disruptions and security concerns, a track record of reliable performance is typically needed to attract customers, further raising the barrier for potential new entrants.
Since Moody’s first rated Global Switch in 2011, the company has demonstrated its commitment to its highly focused strategy, as well as its conservative approach to leverage and development. As of March 31, 2014, Global Switch has achieved a very strong credit profile, with debt to assets at 28.8%, net debt/EBITDA at 3.2x and fixed charge coverage at 7.0x (EBITDA metrics are adjusted to exclude foreign exchange fluctuations; all metrics reflect Moody’s standard adjustments). The company has also been prudent in its development efforts ensuring a high level of pre-letting for new projects.
Counterbalancing these strengths are Global Switch’s relatively small size and resulting asset concentration in a niche asset class with limited alternative use. With a total of ten properties and the largest assets located in London, Paris, Amsterdam and Sydney, Global Switch has material asset concentration, which exposes it to both economic and catastrophic risks. The latter, however, are ameliorated by operating policies to provide redundancy for key power, cooling and security needs that reduce potential for operational interruptions, etc., as well as by property damage and loss of rent policies designed to protect the company from most natural and man-made disasters. Limited alternative uses for Global Switch’s properties are also credit constraining factors.
Global Switch is a privately held company incorporated in the British Virgin Islands, which limits its disclosure (such as frequency of financial reporting). In addition, it is tightly integrated with its parent entity, Aldersgate Investments Limited, owing to its status as a privately held company. The integration involves reliance on Aldersgate’s treasury function and the ability to transfer cash freely between the two entities. The only contractual limitation on the cash transfers is a restriction on dividends not to exceed 90% of EBITDA in Global Switch’s revolving credit agreement. Finally, Global Switch’s assets and cash flows are denominated in local currencies and translated into sterling at each financial reporting date. The company has a partial natural hedge from that portion of its debt and related debt service that is also issued in local currencies; however, it is still exposed to predominantly unrealised foreign exchange (FX) translation differences.
RATIONALE FOR THE RATING OUTLOOK
The stable rating outlook reflects Moody’s expectation of continued favourable supply demand dynamics in the data centre market, as well as Global Switch continuing to pursue its focussed investment strategy. Moody’s expects that Global Switch will sustain its strong credit profile and good liquidity.
WHAT COULD CHANGE THE RATING — UP
Positive pressure on the ratings could arise if (1) fixed charge coverage is maintained above 5.0x; leverage, as measured by net debt/EBITDA, trends below 3.0x, and effective leverage, as measured as debt/assets remains below 30% (EBITDA metrics are adjusted to exclude foreign exchange fluctuations; all metrics reflect Moody’s standard adjustments); (2) tenant concentration risk continues to reduce, while maintaining its currently high occupancy rates and growing the size and diversity of the portfolio; (3) the development pipeline remains at or below 5% of total portfolio value; and (4) a strong liquidity profile is maintained at all times. In addition, further strengthening of corporate governance practices, commensurate with the growth of the business, will be viewed as a positive.
WHAT COULD CHANGE THE RATING – DOWN
A sustained deterioration of occupancy rates, operating performance or financial metrics such that fixed charge cover falls below 4.0x or net debt/EBITDA rises sustainably above 3.75x, a sharp increase in development activity or an inadequate liquidity profile would create downward pressure on the rating (EBITDA metrics are adjusted to exclude foreign exchange fluctuations; all metrics reflect Moody’s standard adjustments). Also, a material shift in the company’s financial policy would also be a concern.
The principal methodology used in this rating was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Global Switch Holdings Limited was founded in 1998. In 2007 Aldersgate Investment, an unlisted investment vehicle owned by Simon and David Reuben raised its interest in the company to 100%. Global Switch reported at fiscal year-end 2014 total revenues of GBP358 million and total assets of GBP4.4 billion.
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Maria K Maslovsky
Asst Vice President – Analyst
Corporate Finance Group
Moody’s Investors Service Ltd.
One Canada Square
London E14 5FA
Michael J. Mulvaney
MD – Corporate Finance
Corporate Finance Group