Moody's downgrades Rackspace

Moody's Investors Service said it downgraded Rackspace Hosting, Inc.'s corporate family rating to B2 from B1, probability of default rating to B2-PD from B1-PD, senior secured rating to B1 (LGD 3) from Ba3 (LGD 3) and senior unsecured rating to Caa1 (LGD 5) from B3 (LGD 5).

The downgrade reflects Rackspace's weak revenue and margin trends, intense competitive pressure and an expectation that leverage will decline – but remain – above 4.5x for the next two years, Moody's said.

The outlook remains negative.

The ratings reflect the company's high leverage, weak organic growth and a view of a tough competitive environment, weakening the company's business positioning, Moody's said.

As the company continues to shift business mix from its legacy managed hosting focus to a differentiated value proposition in private cloud, public cloud and applications services end markets, resulting revenue and margin pressure has delayed previously anticipated de-leveraging, the agency said.

The ratings are supported by Rackspace's moderate scale and good free cash flow profile, driven by recurring revenue, Moody's said.

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