Rackspace Technology Global, Inc. — Moody’s affirms Rackspace’s B2 CFR, assigns B1 to proposed senior secured notes; outlook stable

Rating Action: Moody’s affirms Rackspace’s B2 CFR, assigns B1 to proposed senior secured notes; outlook

Rating Action: Moody’s affirms Rackspace’s B2 CFR, assigns B1 to proposed senior secured notes; outlook stableGlobal Credit Research – 02 Feb 2021New York, February 02, 2021 — Moody’s Investors Service (Moody’s) has affirmed Rackspace Technology Global, Inc.’s (Rackspace) B2 corporate family rating (CFR), B2-PD probability of default rating, B1 rating on its new $2.2 billion seven-year senior secured term loan B (New TLB), B1 rating on its existing $375 million revolver (undrawn) and Caa1 rating on its $550 million of senior unsecured notes due 2028. Moody’s has also assigned a B1 rating to the company’s new $650 million first-priority senior secured notes due 2028 (Secured Notes). The Secured Notes and New TLB are secured by the same collateral on a first-priority basis and are equal in priority ranking. The net proceeds from the proposed Secured Notes and New TLB will be used to fully refinance the company’s existing $2.8 billion term loan B due 2023. The outlook remains stable.Assignments:..Issuer: Rackspace Technology Global, Inc…..Senior Secured Regular Bond/Debenture, Assigned B1 (LGD3)Affirmations:..Issuer: Rackspace Technology Global, Inc….. Probability of Default Rating, Affirmed B2-PD…. Corporate Family Rating, Affirmed B2….Senior Secured Bank Credit Facility, Affirmed B1 (LGD3)….Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD6)Outlook Actions:..Issuer: Rackspace Technology Global, Inc…..Outlook, Remains StableRATINGS RATIONALERackspace’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 revolver, senior secured term loan and senior secured notes 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 RATINGSMoody’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 DISCLOSURESFor 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. 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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.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.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. 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