Internap Corp. Downgraded To 'CCC+' On Weak Operating Performance; Outlook Negative; Debt Ratings Lowered

  • U.S. data center operator Internap Corp.'s operating and financial performance continue to decline, resulting in forecast S&P Global Ratings-adjusted leverage of about 7x through 2020.
  • S&P Global Ratings lowered all ratings on the company by one notch, including our issuer credit rating, to 'CCC+' from 'B-', as we believe the capital structure may be unsustainable longer term.
  • The negative outlook reflects the potential for a lower rating if we believe a default or restructuring is likely within the next 12 months.
NEW YORK (S&P Global Ratings) Aug. 16, 2019—S&P Global Ratings today took the rating actions above. The downgrade reflects our view that the capital structure may be unsustainable longer-term given declining earnings, limited cash generation and declining investment in the business to preserve liquidity. Even with lower capital spending, we forecast limited free cash flow generation over the next several years. We also believe reducing capex may not be sustainable considering its participation in the growing data center industry. Therefore, we believe it will be difficult for the company to deleverage organically with its current capital structure absent an improvement in utilization rates and lower customer churn. In our view, these factors could result in a debt restructuring to right-size the capital structure, which we would view as equivalent to default if lenders are offered less than the original promise.
The negative outlook reflects the potential for a lower rating if the company cannot bolster its liquidity position and financial profile through earnings growth from improved operational performance.
We could lower the rating if we believe the company will face a near-term liquidity shortfall or engage in a distressed exchange within the next 12 months. We could also lower the rating if it becomes more likely it will violate its total net leverage or consolidated interest coverage covenant that cannot be cured. This could occur if earnings volatility increases, given customer churn can fluctuate on a quarterly basis because of customer consolidation in the acquisition-heavy software/internet industry.
Although unlikely over the next year, we could raise our rating on Internap if top-line declines stabilize, while EBITDA grows modestly such that leverage approaches 6.5x with prospects for further improvement. This would most likely be driven by improved data center utilization rates and the successful implementation of the company's portfolio resizing plan. Furthermore, to upgrade the company, we would need to believe the company will not pursue a distressed exchange, which we would view as tantamount to a default.
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