Colocation provider Cyxtera Technologies has filed for Chapter 11 bankruptcy, the company said Sunday. The company had been working for months to find a buyer or reduce its debt load, but will now restructure through a pre-packaged bankruptcy.
The Chapter 11 filing was part of an arrangement with its lenders, who will have the right to gain a controlling equity interest in the company under terms of a restructuring agreement last month. Some of the lenders will provide $200 million in financing to enable Cyxtera to continue operating as it restructures.
"Cyxtera expects to use the Chapter 11 process to strengthen the Company's financial position, meaningfully deleverage its balance sheet and facilitate the business’s long-term success," the company said in a press release. More details are available on Cyxtera's restructuring web site. Cyxtera subsidiaries in the United Kingdom, Germany and Singapore are not included in the bankruptcy case, which was filed in New Jersey.
Cyxtera Technologies operates a global network of 60 data centers and supports 2,300 customers and had $746 million in revenue in 2022. The company was formed in 2016 when Medina Capital, led by former Terremark CEO Manuel Medina, teamed with investors including BC Partners to buy the data center portfolio of CenturyLink for $2.15 billion.
“We have thoroughly evaluated options to enhance value for the company and our stakeholders," said Nelson Fonseca, Cyxtera’s Chief Executive Officer. "Together with our lenders, we determined that initiating this process is the best path forward for Cyxtera and our stakeholders as we pursue new opportunities for growth.
"We appreciate the significant support from our lenders, which will enable us to move through this process as quickly as possible," Fonseca continued. "We are confident these steps will enable us to position our business for the long term as we continue serving our customers with innovative services and the highest levels of support.”
Cyxtera says it will continue to operate its data centers and support its customers, and has sought court approval to pay its employees. The company says it is continuing to pursue a potential sale of the business or "a significant investment from a new investor."
The filing is bad news for the investors who continue to hold Cyxtera shares. "We do not expect shareholders to receive any recovery at the end of this process," the company said in an FAQ.
The effort to arrange a sale or financing was complicated by Cyxtera's debt load and the higher interest rate environment, which has boosted Cyxtera's borrowing costs, complicating its path to profitability. In recent SEC filings, the company reported that it didn't expect to see positive net income until 2030.
The Chapter 11 filing allows the company to restructure its debt, Cyxtera said it expects to move through the process "on an expedited basis." and emerge from bankrupcty before the end of 2023.
"We look forward to emerging from this process as a stronger organization with additional financial flexibility to drive Cyxtera’s next phase of growth,.” said Fonseca.
Implications for Cyxtera's Landlords
Since Cyxtera leases many of its data centers, Cyxtera's Chapter 11 filing creates a potential challenge for its landlords. Cyxtera leases space in 15 facilities operated by Digital Realty, representing $61.5 million in annual revenue, or about 1.7 percent of Digital's annual revenue.
It also leases space in 6 data centers owned by Digital Core REIT, a Singapore-based public company sponsored by Digital Realty. That includes two sites in Los Angeles, three in Silicon Valley and one in Frankfurt. The $16.3 million in annual rent from Cyxtera represents 22.3 percent of revenue for Digital Core REIT.
A bankruptcy filing provides debtors with the opportunity to reject leases to reduce their real estate costs. In its press release, Cyxtera noted that it "is continuing to evaluate its data center footprint, consistent with its commitment to optimizing operations."
“We are disappointed by this recent development, but we wish our customer well as they navigate the bankruptcy process, and we stand prepared to guard against any potential near-term disruption while capturing long-term upside potential as the opportunity presents itself,” said John J. Stewart, CEO of Digital Core REIT. “We are fortunate to have the support of our sponsor, Digital Realty, the largest global data centre owner and operator."
Last year Digital Realty agreed to provide a cash-flow guarantee to Digital Core REIT when Sungard filed for bankruptcy protection.
Digital Core REIT shared a detailed analysis of the facilities leased to Cyxtera, including the potential costs and releasing prospects if any of the Cyxtera leases are rejected. The REIT said it has "performed property diligence, market evaluations and valuation assessments of the facilities leased to the customer" and believes the current tight market for data center space would minimize any impact.