TEXT-S&P affirms Iron Mountain 'BB-' rating

Tue Aug 7, 2012 11:32am EDT

Overview
     -- Iron Mountain is in the process of amending its credit agreement to 
increase its margin of compliance with its fixed-charge coverage covenant.
     -- The company is also planning to issue $950 million of senior 
subordinated notes due 2024, proceeds of which it would use to redeem its 
8.75% notes due 2018, to call its 6.625% notes due 2016, to repay borrowings 
under its revolving credit facility, and for general corporate purposes 
including covering costs related to its planned conversion to a Real Estate 
Investment Trust (REIT). 
     -- We are affirming our 'BB-' corporate credit rating on the company, 
removing all ratings from CreditWatch, and assigning a 'B+' rating to its 
proposed $950 million notes due 2024.
     -- The negative outlook reflects our expectation that leverage will 
increase and that the company's conversion to a REIT could reduce its business 
and financial flexibility.

Rating Action
On Aug. 7, 2012, Standard & Poor's Ratings Services affirmed all of its 
ratings on Boston-based information storage company Iron Mountain Inc., 
including the 'BB-' corporate credit rating. At the same time, we removed all 
ratings from CreditWatch, where they were placed with negative implications on 
June 7, 2012. The rating outlook is negative.

In addition, we assigned a 'B+' rating to the company's proposed $950 million 
senior subordinated notes with a recovery rating of '5', indicating our 
expectation of modest (10% to 30%) recovery for lenders in the event of a 
payment default. The company is expected to use the proceeds of the notes to 
redeem its 8.75% notes due 2018, to call its 6.625% notes due 2016, to repay 
borrowings under its revolving credit facility, and for general corporate 
purposes, including covering costs related to its planned conversion to a Real 
Estate Investment Trust(REIT).

Rationale
We removed the ratings from CreditWatch with negative implications because the 
proposed amendment will improve the company's margin of compliance with its 
fixed-charge covenant.

The rating on Iron Mountain reflects Standard & Poor's view that the company's 
financial risk profile is "aggressive" (based on our criteria), a function of 
its still-high leverage, relative capital intensity, and its increased 
shareholder return orientation. Our business profile assessment on the company 
is "fair," reflecting our view that Iron Mountain's business benefits from its 
market leadership and a strong base of recurring revenue. However, we believe 
that the company's revenue will decline somewhat because of unfavorable 
foreign exchange rates and paper prices as well as both pressure on the core 
storage business from migration to digital storage and the sluggish economy.

Iron Mountain is a global market leader in the records management business, 
operating in more than 35 countries. The company has a diverse client base, 
with more than 155,000 clients. Low customer attrition, high switching costs, 
and annual and multiyear contracts provide stable, recurring, monthly storage 
fees. The company's recurring revenue base, scale, and continual improvements 
in productivity have enabled it to preserve a healthy EBITDA margin, in the 
30% area. However, it faces risks related to the migration of records to 
digital storage. Iron Mountain has experienced some volume loss as a result of 
clients choosing to destroy or digitally store their physical records. 
Furthermore, the soft economy has contributed to revenue weakness.

Under our base-case scenario, we expect revenue for the full year of 2012 to 
be flat or decline at a low-single-digit percent rate due to unfavorable 
exchange rates and lower paper prices. Excluding these items, we expect 
low-single-digit percent revenue growth. Iron Mountain's operating performance 
has been steady, but growth has flattened, following several years of organic 
revenue growth averaging a high-single-digit percent rate. We expect mature 
near-term core revenue trends will continue because of the slow economic 
recovery. We also expect low- to mid-single-digit percent reported EBITDA 
declines in 2012, because of lower high-margin recycled paper revenue and 
costs related to its conversion to a REIT. For 2013, we expect revenue to 
exhibit these mature trends and that EBITDA will decline at a low-single-digit 
percent pace because of ongoing costs related to the conversion to a REIT.

For the second quarter, total revenue declined 0.8% because of unfavorable 
foreign-exchange rates and lower paper prices. Excluding unfavorable foreign 
exchange fluctuations and acquisition activity, storage revenue increased 
3.5%, while service revenue, which includes revenue from paper sales, declined 
5.2%. For the same period, EBITDA (before gains and losses on disposals or 
write-downs of property, plant, and equipment) increased by 3.5% because of 
productivity gains in the international segment. The EBITDA margin was 31.4% 
compared with 31% for the year ended Dec. 31, 2011.

For the 12 months ended June 30, 2012, EBITDA coverage of interest (adjusted 
for leases) was 3.1x. Iron Mountain's leverage is in line with the debt to 
EBITDA ratio of 4x to 5x we associate with an aggressive financial profile. 
Total debt (adjusted for leases, accrued interest, and asset-retirement 
obligations) to EBITDA was 4.6x, higher than the year ended Dec. 31, 2010, 
when it was 4.4x, principally because of debt-financed share repurchases.

In April 2011, management committed to stockholder payouts (including 
quarterly dividends) of about $2.2 billion through 2013 (roughly 5x the 
company's free cash flow). Through June 30, 2012, the company had returned 
$1.2 billion to shareholders in the form of $1 billion of share repurchases 
and $200 million in dividend payouts. In June, the company announced that it 
intends to convert to a REIT, and plans to distribute $1 billion to $1.5 
billion in earnings and profit (E&P) payments to shareholders, 20% of which 
will be in cash and 80% in shares. As part of the REIT conversion process, the 
company must distribute its accumulated earnings and profit prior to becoming 
a REIT. The company also plans to distribute $185 million in quarterly 
dividends this year. Additionally, there will be one-time conversion costs, 
tax payments, and advisory fees of between $325 million to $425 million 
related to the conversion to a REIT. The proposed note offering will be 
partially used to meet these future costs. Management has maintained its 
leverage target of 3x to 4x, according to its calculations. Converting this to 
our calculation of leverage, which is primarily adjusted for operating lease 
obligations, this would result in leverage in the range of between the low-4x 
and the low-5x areas. We believe that leverage will increase moderately above 
the range, to the mid-5x area, due to the company's intention to meet these 
E&P payments and due to the additional costs related to the REIT conversion. 
The company converted 22.6% of EBITDA to discretionary cash flow for the 12 
months ended June 30, 2012. We expect discretionary cash flow will be negative 
this year because of the additional distributions and expenses related to the 
conversion process.

Liquidity
We view Iron Mountain's liquidity as "adequate" for normal operating needs. 
Our assessment of the company's liquidity incorporates the following 
expectations and assumptions:
     -- We expect the company's sources to exceed its uses by 1.2x over the 
next 12 months.
     -- We also expect net sources to remain positive, even with a 15% drop in 
EBITDA.
     -- If the company's EBITDA declines by 15%, the company would be in 
violation of its covenants, despite the amendment process. However, we expect 
that the company would be able to afford an amendment, should its margin of 
compliance with covenants become tight.
     -- Because of the company's cash flow generation, we believe it could 
absorb low-probability, high-impact adversities.
     -- We believe the company has good relationships with its banks and a 
good standing in the capital markets.

Liquidity sources include unrestricted cash balances of $170.2 million. The 
company also has a revolving credit facility of $725 million, of which $455 
million was available as of June 30, 2012. We expect capital expenditures of 
about $250 million in 2012, including customer acquisition costs. We expect 
Iron Mountain's discretionary cash flow will be negative this year and remain 
negative in 2013 because of additional expenses and E&P distributions to 
shareholders related to the conversion. The company is in the process of its 
amending its credit agreement. We expect the company's margin of compliance to 
improve following the amendment, and that the covenants will not step down. 
Near-term maturities are modest.

Recovery analysis
For the latest recovery analysis, see our recovery report on Iron Mountain, to 
be published following this report.

Outlook
The negative outlook reflects our expectation that leverage will increase as a 
result of costs related to the REIT conversion. We could lower the ratings if 
leverage rises materially or if we conclude that business and financial 
flexibility will decrease if the company converts to a REIT. 

We could revise our outlook to stable if the company decides not to pursue the 
REIT conversion and financial policy does not become more aggressive, or if we 
conclude that business and financial flexibility will not be materially 
reduced if the company converts to a REIT.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed; Removed From CreditWatch
                                        To                 From
Iron Mountain Inc.
 Corporate Credit Rating                BB-/Negative/--    BB-/Watch Neg/--

New Ratings

Iron Mountain Inc.
 Subordinated                                            
  US$950 mil sr nts due 2024            B+                 
   Recovery Rating                      5                  

Ratings Affirmed; Off CreditWatch; Recovery Ratings Unchanged
                                        To                 From
Iron Mountain Inc.
 Senior Secured                         BB+                BB+/Watch Neg
   Recovery Rating                      1                  1
 Senior Unsecured                       B+                 B+/Watch Neg
   Recovery Rating                      5                  5
 Subordinated                           B+                 B+/Watch Neg
   Recovery Rating                      5                  5

Iron Mountain Canada Corp.
Iron Mountain Information Management Inc.
Iron Mountain Switzerland GmbH
  Senior Secured                        BB+                BB+ /Watch Neg
   Recovery Rating                      1                  1

Iron Mountain Nova Scotia Funding Co.
 Subordinated                           B+                 B+/Watch Neg
   Recovery Rating                      5                  5


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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