Fitch Affirms Global Switch at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency)LONDON, March 03 (Fitch) Fitch Ratings has affirmed data centre owner Global Switch Holdings Ltd's (Global Switch) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. Its wholly owned subsidiary Global Switch Property (Australia) Pty Limited's senior unsecured rating has also been affirmed at 'BBB+'. The Outlook on the Long-term IDR is Stable. The Short-term IDR has been affirmed at 'F2'.Cash flow continues to be resilient, driven by a geographically diversified portfolio (valued at GBP4bn) of large scale data centres that generate contractual rental income with an average lease length prolife of 4.7 years. The current ratings also reflect a conservative capital structure with a Fitch forecast of net debt/EBITDA remaining below 4.5x in 2016 and 2017.KEY RATING DRIVERSShorter Average Lease Length GlobalSwitch's average lease length decreased to below five years (4.7) at end-2015 and the company faces some significant lease maturities over the next 12 months. It includes one key client that decided to build its own data-centre but will finally extend a majority of its leases. The company already renewed several key contracts and has lined-up blue-chip technology names to take some potentially vacant space. Extensions and new leases are generally made at a premium to current rents.Temporarily Higher Vacancies While the company has a high and stable occupancy rate of around 90%, it may experience higher vacancies as it intends to selectively re-develop some of the vacated space. The company deliberately incurred a higher churn by not renewing some leases in its London centre and plans to use some vacancies in another centre for specific redevelopment (most notably the expiry of a legacy shell and core lease). Fitch views the underlying churn as low and would expect occupancy ratios to remain around 90% in the medium term.Low Leverage Relative to PeersGlobal Switch's net debt/EBITDA of 3.2x for the financial year ended March 2015 (3.4x the year prior) and loan-to-value (LTV) of 20% (21%) compare favourably with Fitch-investment grade rated real estate peers, whose metrics average 8x net debt/EBITDA and 40% LTV. This offsets the somewhat higher operating risk profile that Global Switch exhibits compared with commercial real estate companies focused on more core asset classes. Its immediate rated peer is Digital Realty Trust, Inc. (BBB/Stable), which has a similar business model, albeit more focused on the US market (80% of revenues are from north-America). Its net debt/EBITDA has been around 5x over the last few years.Measured Development RiskThere is potential for around GBP278m of new developments with a new site in Hong Kong and extensions or redevelopment in Sydney and London, providing a greater global footprint in growth cities. While construction works have started in Hong-Kong and Sydney, work is spread over a two-to-three year period and therefore manageable from a cash flow perspective. Fitch also notes the pre-commitment of some large TMT names.Prime Portfolio of Data CentresGlobal Switch is one of the world's leading players with prime assets in a sector with high barriers to entry. Global Switch specialises in high-specification data centres located in strategic city locations close to business and telecommunication hubs, with reliable power supplies, high levels of security, a strong operating track record and a well-positioned development pipeline securing future growth. We believe rental income should benefit from structural growth in the medium term, largely correlated to global internet traffic, bandwidth requirements, outsourcing trend and cloud computing.Geographically Diversified Property PortfolioGlobal Switch has a portfolio of 10 data centres with some single building concentrations; notably, the largest London data centre represents around 28% of the company's GBP4bn portfolio. However, these assets are multi-tenanted and in prime locations. Geographical diversification is solid with the portfolio spread across seven countries, across Europe and Asia-Pacific.Tenant Concentration HighCompared with the broader Fitch-rated real estate peer group tenant concentration is high, with the top 10 tenants making up 50% of total rental income and the top 20 tenants representing 68%. However, the tenant profile is strong with a majority of the largest tenants being investment-grade and individually holding numerous lease contracts across multiple sites, although with a bias to the TMT sector and financial institutions. Niche Asset ClassData centres are specialised properties and technological obsolescence over the long term is possible. However, there are significant barriers to entry and medium-term IT trends are favourable. Compared with other real estate assets, the investment market for data centres is less liquid with fewer potential buyers, making these assets potentially more difficult to divest in a depressed market. While Global Switch's financial metrics are consistent with an 'A' category profile, its ratings are constrained as data centre properties are a less-than-mature asset class, the market for selling these assets is less liquid, and the risk of a fast-changing technological environment.KEY ASSUMPTIONS- Most of the expiring leases are either renewed or replaced with new lease with new tenants leading to a flat occupancy ratio (excl. redevelopment)- Some development and extension driving top line-growth (mainly Hong Kong)RATING SENSITIVITIESPositive: Given the niche asset class Global Switch is operating Fitch currently view a further upgrade as unlikely.Negative: Future developments that may, individually or collectively, lead to negative rating action include:-Aggressive committed development capex not covered by existing liquidity-Significant deterioration of the average lease length or vacancies or renewals/new leases made at large discounts-EBITDA net interest cover below 3.5x (FY15: 4.9x) on a sustained basis-Leverage above 4.5x net debt/EBITDA on a sustained basis-A material increase in secured debt at the expense of unsecured bond holdersLIQUIDITYGlobal Switch's liquidity is adequate. The company does not have any debt maturing before 2018. Its GBP478m cash balance at FYE15 reflects the full drawing of its committed GBP375m RCF over the year end, which covers both dividends and expected capex. Global Switch is not a REIT and as such does not need to pay a dividend under any regulatory regime, which further supports liquidity.FULL LIST OF RATING ACTIONSContact: Principal Analyst Jean-Baptiste BouillaguetAssociate Director+44 20 3 530 1606Supervisory AnalystFrancisco Tamarit PorterSenior Director+44 20 3 530 1409Fitch Ratings Limited30 North ColonnadeLondon E14 5GNCommittee ChairpersonFrederic GitsManaging Director+33 1 44 29 91 84Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.Additional information is available on www.fitchratings.comApplicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=1000414Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000414Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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