Oct 25 -
Summary analysis -- Interxion Holding N.V. ------------------------ 25-Oct-2012
CREDIT RATING: B+/Stable/-- Country: Netherlands
Primary SIC: Communications
Credit Rating History:
Local currency Foreign currency
16-Feb-2010 B+/-- B+/--
02-Feb-2010 B-/-- B-/--
The rating on Dutch data center operator Interxion Holding N.V. (Interxion) reflects
Standard & Poor's Ratings Services' view of the group's "highly leveraged" financial risk
profile and its "fair" business risk profile.
The highly leveraged financial risk profile primarily factors in our view that the large
capital investments associated with Interxion's expansion plans will keep the group's free
operating cash flow (FOCF) generation negative over the medium term (next two to three years)
and potentially require additional debt financing. However, the group benefits from strong and
predictable underlying funds from operations (FFO) through its significant recurring revenues
and strong profit margins.
The fair business risk profile reflects our opinion that the competitive environment in
which Interxion operates could lead to meaningful shifts in the supply-demand dynamics of the
data center and co-location market over the medium term. These potential variations could
increase pressure on the group's operating margins, owing to its inherently high operating
leverage, and on cash flow generation. However, this is offset in part by Interxion's status as
one of the few carrier-neutral data center providers with a presence in most European
communications hubs; moderate barriers to entry in the industry; and currently favorable
supply-demand dynamics. The latter are driven by the limited amount of space available in key
Internet hub locations; growth in Internet traffic and communications volumes in general; and
limited penetration, so far, of outsourced data centers in Europe.
S&P base-case operating scenario
We continue to anticipate that Interxion's percentage revenue growth for full-year 2012 will
be in the low teens on the back of strong reported year-on-year revenue growth of 13% in the
second quarter of 2012. The chief growth drivers are the group's strong investment in additional
capacity and its resilient capacity utilization levels due to supportive demand dynamics. The
group's reported EBITDA margin of 40% on June 30, 2012 (on a 12-month rolling basis), is
consistent with our forecast of about 40% for 2012. We see potential further improvement in
reported EBITDA margins to around 41% in 2013.
S&P base-case cash flow and capital-structure scenario
We believe that Interxion's expansion plans will continue to require significant capital
spending, resulting in negative FOCF over the medium term. In 2011, the group's tangible and
intangible capital expenditures (capex) of EUR162 million exceeded operating cash flow by almost
EUR100 million, by our calculations. We anticipate that FOCF will potentially turn positive in
2015; however, if Interxion's capital spending is higher than we forecast over the coming years,
FOCF could stay negative for longer.
We forecast that Interxion's Standard & Poor's-adjusted debt to EBITDA will remain around 4x
at year-end 2012 and 2013, compared with 4.2x on Dec. 31, 2011, due to continued EBITDA growth
contributed by the group's recently opened data centers. This is despite a continued rise in
operating lease commitments following capacity expansion. We capitalize these commitments and
include them in Interxion's reported debt according to our methodology. We calculate adjusted
leverage on a gross debt basis.
We assess Interxion's liquidity as "adequate" under our criteria. Thisreflects our view that
the group's sources of liquidity will cover its uses by at least 1.2x for the next 12 months.
As of June 30, 2012, we estimate Interxion's liquidity sources over the next 12 months to be
about EUR231 million. These include:
-- Cash and cash equivalents of about EUR85 million;
-- Forecast FFO of about EUR85 million; and
-- A EUR60 million undrawn committed revolving credit facility (RCF) maturing in May 2016.
The credit facility includes financial covenants, under which we project Interxion will maintain
We estimate Interxion's liquidity needs over the same period to be about EUR190 million,
primarily comprising capex, which the group forecasts at about EUR170 million-EUR190 million. We
understand that Interxion has favorable working capital dynamics due to its upfront billing and
collections, and that the group only faces EUR0.75 million of debt maturities in the next 12
We note that much of the group's capex is tied to data center expansion. This provides some
cushion for the group to delay or scale down expansionary capex if industry conditions
deteriorate and reduce demand for co-location space, albeit with a likely time lag, in our
opinion. Nevertheless, the "adequate" liquidity profile will depend on the group bolstering its
balance sheet with additional financing given its anticipated negative consolidated free cash
flow generation in the medium term.
The issue rating on Interxion's EUR60 million RCF is 'BB'. The recovery rating on this
instrument is '1', reflecting our expectation of very high (90%-100%) recovery in the event of a
The issue rating on the EUR260 million senior secured notes (including the recent tap
issuance) is 'BB-'. The recovery rating on these notes is '2', reflecting our expectation of
substantial (70%-90%) recovery in the event of a payment default.
The issue and recovery ratings reflect our valuation of Interxion as a going concern, given
its leading market position in Europe's key Internet hubs, valuable long-term relationships and
contracts with a fragmented and established customer base, and specific industry characteristics
such as moderate barriers to entry and the cash-generative nature of the business. Based on our
valuation, we estimate Interxion's stressed enterprise value at about EUR380 million. We have
pushed back the year of default in our hypothetical default scenario to 2016 from 2015, assuming
that the group's expansion plans do not yield the forecast returns, resulting in continued
negative cash flows beyond our current estimates.
While cover for the notes nominally exceeds 90%, we maintain a recovery rating of '2' to
reflect the risks inherent in Interxion's expansion strategy, which, under our default scenario,
might require additional debt financing beyond the existing facilities. This in turn could lower
recoveries for noteholders, depending on the extent of additional financing required.
The stable outlook reflects our view that Interxion will continue to benefitfrom increased
demand for data center capacity, resulting in sustained capacity utilization rates and strong
growth in revenues and EBITDA. This should enable the group to maintain adjusted debt to EBITDA
of less than 5x over the next 12 months, in our opinion. The stable outlook also factors in
Interxion's maintenance of adequate liquidity despite high planned expansionary capex.
We could lower the ratings if Interxion's liquidity weakens in the absence of proactive
financing or if pricing pressures erode EBITDA such that the group's adjusted leverage ratio
increased to more than 5x, while reducing its FFO in absolute terms. Pricing pressures could
arise due to falling capacity utilization rates or shifts in the supply-demand dynamics for data
centers in the group's key markets.
The potential for an upgrade of Interxion is limited, in our view, given that we anticipate
significant negative FOCF generation through 2014 at least, but this remains highly dependent on
the level and timing of expansionary capex. Over time, however, we could consider a positive
rating action if Interxion were to approach sustainable positive free cash flow while adjusted
leverage remained in the range of 3.5x-4.0x on a sustainable basis. Additionally, an upgrade
would hinge on liquidity remaining adequate.
Related Criteria And Research
-- Research Update: Interxion Holding N.V. Outlook Revised To Stable From Negative On
Successful IPO; 'B+' Rating Affirmed, March 10, 2011
-- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For
Global Corporate Issuers, July 2, 2010
-- Interxion Holding N.V., Feb. 16, 2010
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008