S&P: Iron Mountain Inc. 'BB-' Rating Affirmed; Existing Unsecured Notes Downgraded; New Debt Rated
At the same time, we assigned our 'BB-' issue-level rating and '3' recovery rating to Iron Mountain Canada Operations ULC's proposed C$250 million senior unsecured notes due 2023. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%; upper half of the range) of principal for debtholders in the event of a payment default.
We also revised our recovery rating on Iron Mountain Canada's C$200 million senior unsecured notes due 2021 to '3' from '2' and subsequently lowered the issue-level rating to 'BB-' from 'BB'. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%; upper half of the range) of principal for debtholders in the event of a payment default.
Our other ratings on the company's debt are unchanged.
"The downgrade and revised recovery rating reflect both the increased senior unsecured debt at Iron Mountain Canada due to the new senior unsecured note issuance and the lower lender recovery prospects under our simulated recovery analysis waterfall due to the dilution," said S&P Global Ratings' credit analyst Jawad Hussain.
The stable rating outlook reflects our expectation that Iron Mountain will be able to leverage its increased size, scale, and geographic diversification to generate low - to mid-single-digit organic revenue growth while improving its operating margins. We also expect lease-adjusted leverage to moderate to the low-5x area by 2017 and to below 5x by 2018 as the company realizes full synergy benefits from the Recall acquisition over the next few years.
We could lower our corporate credit rating on Iron Mountain if the company isn't able to successfully integrate the Recall assets and, as a result, it isn't able to fully realize the cost efficiencies and benefits of its increased size and scale. This would likely result in weaker-than-expected operating performance and lease-adjusted leverage remaining in the mid-5x area by the end of 2017. Additionally, we could lower the rating if the company undertakes any future sizeable debt-financed acquisitions that would result in leverage remaining above 5x beyond 2018.
We view an upgrade as unlikely over the next one to two years, given the company's status as a real estate investment trust, which reduces its financial flexibility. An upgrade would incorporate indications that Iron Mountain's financial policy will become less aggressive and likely entail the issuance of equity reduces lease-adjusted leverage toward the 4x area.