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.