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SAVVIS Gets Low-Grade Rating, Stable Outlook

By Kelly Teal
July 19, 2010 - News

Standard & Poor’s has assigned a low-grade, or speculative, credit rating and a stable outlook to SAVVIS Inc. as the managed services provider works to refinance its debt and fund its recent acquisition of Canadian rival Fusepoint Inc.

SAVVIS, which specializes in cloud computing, data-center colocation and other IT services for enterprises, said earlier this month it was signing up for a new senior secured credit facility. The arrangement will allow SAVVIS to borrow up to $625 million to repay existing debt and, if there’s any money left over, cover general corporate purposes. Of that $625 million, $550 million will come in the form of loans due in 2016. The remaining $75 million will be a revolving credit facility maturing in 2014.

SAVVIS plans to use part of the $550 million loan plus $15 million in cash to finance its in-process, $345 million tender offer. The Missouri-based company then will put another $110 million toward the Fusepoint deal, send about $85 million worth of checks to vendors and pay for transaction fees.

Analysts for ratings service Standard & Poor’s said SAVVIS’ plans appear sound, although they’ll assign final ratings once all of the transactions close.

“The rating reflects what we consider to be the company's aggressive leverage,” Standard & Poor's credit analyst Richard Siderman explained in a prepared statement. Plus, he said, SAVVIS’ prospects for “near-term free cash flow” are limited because of expansion-related capital expenditures. In addition, SAVVIS faces a “vulnerable business risk profile” thanks to competition from “much larger and better capitalized rivals and pricing pressure.”

However, Siderman added, there’s so much Internet-traffic growth and a push for IT outsourcing that not all bodes poorly for SAVVIS.

SAVVIS will hold its second-quarter earnings call on July 26. Wall Street is projecting losses of 20 cents per share on sales of $220 million. SAVVIS reported a loss of 21 cents per share on sales of $217 million for the three months ended March 31. Analysts for stock adviser SmarTrend have been advising clients to sell their shares of SAVVIS. 

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