Sungard Availability Services (Sungard AS), a data center operator focused on retail colocation, disaster recovery solutions, and managed services, announced that it has filed voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Southern District of Texas (Houston Division) and filed for protection under the Companies’ Creditors Arrangement Act (CCAA) in the Ontario Superior Court of Justice in Toronto, Canada. Additionally, Sungard has entered into a restructuring support agreement (RSA) with holders of more than 80% of each of its first-lien and second-lien term loan obligations.
Overall, Sungard Availability Services expects to complete the Chapter 11 bankruptcy process in four to six months, by mid- to late-summer 2022. Notably, less than one month ago, the company’s UK subsidiary initiated an administration (i.e., insolvency) proceeding for its business in the United Kingdom.
It is also worth noting that in May 2019, via a previous process, Sungard Availability Services completed a pre-packaged Chapter 11 filing. Through this action, Sungard reduced its long-term debt by more than $800m and received $100m of new liquidity from the company’s creditors.
Nevertheless, Sungard Availability Services remains in financial distress, as evidenced by its most recent Chapter 11 bankruptcy filing. As such, Dgtl Infra reviews Sungard’s business, financials, key shareholders, the events leading up to its Chapter 11 bankruptcy filing, the bankruptcy mitigation measures taken by Sungard, other constituents that the process impacts, and the next steps in Sungard’s process.
Sungard Availability Services – Overview
Sungard Availability Services is headquartered in Wayne, Pennsylvania and delivers hybrid IT solutions to enterprise customers. The company operates 55 facilities, comprising 24 data centers and 31 workplace recovery facilities, which serve 2.0k customers across nine countries, including the United States, United Kingdom, Canada, Ireland, France, India, Belgium, Luxembourg, and Poland.
Of Sungard’s 55 total facilities, 54 are leased, with the company’s only owned campus being in Lognes, France. Collectively, the company’s leased facilities total 4+ million gross sqft and 1+ million sqft of sellable space.
Additionally, the company employs ~585 individuals in the United States (550 employees) and Canada (35 employees).
For fiscal year 2021, Sungard Availability Services generated revenue of $587.3m. The company’s revenue has fallen from $833.4m in 2019, a decline of $246.1m or -29.5%. To this end, Sungard’s new customer contract signings in 2019 and 2020 have been insufficient to replace revenue lost due to non-renewal of contracts at expiration and renewals at lower prices.
Further, the company’s total comprehensive net loss across all of its business lines has grown from $114.8m in 2020 to $169.4m in 2021, a widening of its net loss by $54.6m, equivalent to 47.6%.
Presently, Sungard has $423.8m in aggregate principal amount of funded debt obligations, in the form of a revolving credit facility and three term loan facilities.
|Revolving Credit Agreement||$29.0m|
|Prepetition 1L Term Loan Credit Agreement||$108.2m|
|Prepetition Non-Extending 2L Credit Agreement||$8.9m|
|Prepetition New 2L Credit Agreement||$277.6m|
In contrast, the company’s cash balance stands at only $5.0m, which is net of a $13.5m liquidity “block”, in favor of Sungard’s asset-based lender, PNC Bank.
Sungard Availability Services’ top 5 shareholders own 73.6% of the company’s equity interest, with each of these shareholders individually owning a 10%+ stake. Specifically, Sungard’s top 5 shareholders are Angelo Gordon, Blackstone Credit, FS KKR Capital Corp, Carlyle Group, and Arbour Lane Capital Management.
|FS KKR Capital Corp||11.7%|
|Arbour Lane Capital||10.4%|
|Top 5 Shareholders||73.6%|
Sungard’s equity holders own their interests through a variety of vehicles including private equity, credit, and collateralized loan obligation (CLO) funds, as well as business development companies (BDCs) and insurance firms.
Why Did Sungard Availability Services File for Chapter 11 Bankruptcy?
Sungard Availability Services’ Chief Executive Officer and President, Mike Robinson, attributes the company’s financial difficulties to the following factors:
- Challenges in its capital structure (i.e., too much debt)
- Delayed customer spending decisions
- Insourcing and reductions in IT spending
- Energy price inflation
- Reduction in demand for certain services (e.g., workplace recovery)
In turn, these factors drove inefficiencies in Sungard’s operating structure, principally above-market / uneconomical leases and underutilized space.
Below are further details on the specific challenges that Sungard Availability Services faced, which ultimately led to its Chapter 11 bankruptcy filing.
Revenue and Expense Duration Mismatch
While Sungard leases its facilities on fixed long-term periods, the revenue that the company generates from those facilities, such as for colocation services, is short-term (i.e., 1 to 3 years) and has been declining, contracting the company’s margins. Simply put, Sungard’s revenue re-prices on a more frequent basis than a major portion of its expense base, which is particularly troubling in a deflationary pricing environment.
Sungard has a sizable fixed cost base, which includes equipment leases, software licenses, hardware maintenance, subcontracting & temporary labor costs, and security. As the company’s revenue has declined, it has not been met with a corresponding fixed cost reduction of the same magnitude.
Infrastructure Transition, Cloud Competition
Sungard’s recent business plan was premised on transitioning the company from an infrastructure-focused vendor to a services-oriented partner to its customers. However, rapid declines in demand for the company’s legacy infrastructure products hindered Sungard’s ability to invest in and grow its newer service-based offerings.
Disaster Recovery – Example
Sungard’s transition from legacy, infrastructure-based colocation disaster recovery solutions that had high profit margins, to cloud-based Disaster Recovery as a Service (DRaaS) has proven challenging. Specifically, Sungard points to strong competition from cloud service providers, such as Amazon Web Services (AWS) and Microsoft Azure.
Notably, cloud-based services are cheaper than legacy disaster recovery solutions and customers can easily migrate to other service providers. Finally, Sungard notes that DRaaS solutions have changed the way disaster recovery services are now delivered – adding flexibility and remote working capabilities.
Workplace Recovery – Segment Decline
Previously, Sungard benefitted from its high-margin Workplace Recovery services segment. However, with traditional offices rapidly shifting to remote working environments – due to pandemic-related quarantines, shelter-in-place, and stay-at-home orders – demand for the company’s Workplace Recovery services has dramatically declined.
Even after quarantines were lifted, customers had realized that their employees could work effectively remotely, reducing current and future demand for Sungard’s Workplace Recovery services. Additionally, many of Sungard’s customers delayed spending decisions or reduced their IT costs, leading to further customer attrition through decisions not to renew contracts.
Helpfully, Sungard identifies its significant competitors, which many of the aforementioned business-related headwinds could affect as well. Particularly, these significant competitors are Bluelock, C&W Business, CloudHPT, Expedient, IBM, iland, InterVision, Microsoft, Recovery Point, and TierPoint.
Bankruptcy Mitigation Measures Taken by Sungard
In an attempt to improve the trajectory of its operations, prior to filing for Chapter 11 bankruptcy, Sungard Availability Services took the following corporate actions:
- Workforce Reductions: Sungard implemented cost-cutting measures, including reductions of over 40% of its workforce, with the latest downsizing occurring in December 2021
- Lease Restructuring: Sungard sought to consensually restructure certain uneconomical leases for its data centers and workplace recovery sites
- Asset Sales: since December 2019, Sungard has been marketing certain of its facilities through investment bank DH Capital. Specifically, these sale processes have included:
Sale-Leaseback of Owned Data Centers
Beginning in February 2020, DH Capital contacted ~24 parties to explore interest in three of Sungard’s owned data centers located in i) Smyrna, Georgia, ii) Mississauga, Ontario, and iii) Lognes, France. Ultimately, only the Georgia and Ontario data centers were sold to Landmark Infrastructure Partners, generating ~$50m in gross proceeds for Sungard.
Sale-Leaseback of Workplace Recovery Centers
Beginning in November 2020, DH Capital contacted ~33 parties to explore interest in three of Sungard’s owned workplace recovery centers located in i) Cypress, California, ii) Northbrook, Illinois, and iii) Grand Prairie, Texas. Ultimately, all three properties were sold, generating ~$21m in gross proceeds for Sungard.
DH Capital is also engaging in ongoing marketing and sale efforts for three leased Workplace Recovery centers, two of which are in Luxembourg and one of which is in Belgium. Furthermore, DH Capital is currently in discussions with certain parties regarding other Sungard facilities. Finally, beginning in July 2021, Sungard, through DH Capital, launched a marketing process to solicit interest in a transaction that would include a carve-out of one of the company’s business units.
Chapter 11 Bankruptcy Process
To support Sungard Availability Services’ normal course of business during the Chapter 11 process, the company has secured access to $7m of bridge financing. Additionally, the company has received a commitment for up to ~$95.3m in new money debtor in possession (DIP) financing from certain of its secured lenders.
With this additional financing, Sungard intends to meet its financial obligations, including paying suppliers and employees in the ordinary course of operations for goods and services delivered.
Sungard Availability Services’ operations in Ireland, France, India, Belgium, Luxembourg, and Poland are not impacted by proceedings in the United States, Canada, or the United Kingdom.
Sungard Availability Services’ legal advisors are Akin Gump Strauss Hauer & Feld, Jackson Walker, and Cassels Brock & Blackwell. Additionally, FTI Consulting is providing financial advisory services related to interim management, restructuring advisory, turnaround consulting, operational due diligence, and performance improvement services.
Houlihan Lokey is serving as Sungard Availability Services’ restructuring investment banker, focusing on potential post-petition financing options. Finally, DH Capital is acting as Sungard Availability Services’ investment banker, concentrating on potential asset or whole-company sales.
Who Else is Impacted by Sungard’s Bankruptcy Process?
Sungard Availability Services’ Chapter 11 bankruptcy process impacts a number of constituents including unsecured creditors and landlords, as well as the company’s customers. Given that Sungard leases nearly all of its facilities, both wholesale data center operators and commercial real estate investment firms are significant counterparties to the company. For example, wholesale data center operators, such as Digital Realty, lease space to a single customer, like Sungard, which consists of either a full building or data hall with access to cooling and power infrastructure.
Unsecured Creditors and Landlords
Below are examples of 12 major unsecured creditors and landlords of Sungard Availability Services:
- Amazon Web Services (AWS): Sungard offers public cloud services through AWS
- AT&T: network service provider which Sungard has average monthly spend of $87k with
- Digital Realty: Sungard is Digital Realty’s 23rd largest customer and leases ~10.5 megawatts directly from Digital Realty across six facilities in four markets, totaling ~$22m of annualized revenue, or 0.7% of Digital Realty’s total revenue
- Digital Core REIT (SGX: DCRU): Sungard is a tenant at Digital Core REIT’s 371 Gough Road facility in Markham, Ontario, where it occupies 2.7 megawatts of power capacity. Specifically, Sungard represents ~$5m of annualized revenue, equivalent to 7.1% of Digital Core REIT’s total revenue
- Element Critical: data center operator whose sponsor is Safanad and Industry Capital. Sungard is a tenant of Element Critical
- Ensono: managed services provider whose sponsor is KKR, via its Americas XII fund
- Landmark Dividend: sponsor is DigitalBridge, through DigitalBridge Partners II
- Landmark Infrastructure: Sungard is a tenant at Landmark’s data centers in Mississauga, Ontario; Richardson, Texas; Smyrna, Georgia; and Wood Dale (Chicago), Illinois
- Mapletree Industrial Trust: Sungard comprised 6.7% of gross rental income (GRI) in the 29-data center Sila Realty Trust portfolio, which Mapletree acquired for $1.3bn
- Microsoft Corporation: Sungard offers public cloud services through Microsoft Azure
- Netrality Data Centers: interconnection-focused data center operator whose sponsor is Macquarie Infrastructure and Real Assets (MIRA)
- Russo Development: residential and commercial real estate investment firm with multiple properties in Carlstadt, New Jersey leased to Sungard
Sungard Availability Services’ top customers, ordered alphabetically, are Aecon Construction Group, Allstream Business, Aramark Services, Ascension Health, AstraZeneca, Atos, AXA, Backblaze, BlueCross BlueShield of South Carolina, Cerner, CGI Inc, Cognizant, Crédit Agricole CIB, Credit Suisse, CSRA, CVS Pharmacy, DocuSign, Export Development Canada (EDC), First Republic Bank, FIS, Fiserv, Global Atlantic Financial, HCL Technologies, Home Office, IHS Markit, IQVIA, Lurie Children’s Hospital of Chicago, Menzies Aviation, New Jersey Resources (NJR), Norwegian Cruise Line, NYC Health + Hospitals, NYU Langone Health, Oracle, Paul, Weiss, Rifkind, Wharton & Garrison LLP, Ross Stores, Sainsbury’s (JS Information Systems Limited), Samsung, Subway (Franchise World Headquarters), Thames Water, TJX Companies, Transics, U.S. Bank, UNFI, Vision Service Plan, Worldpay, Wyndham Hotels & Resorts, Xerox, and Yardi.
Sungard’s Next Steps – Sale or Equitization Scenario
Sungard Availability Services’ restructuring support agreement (RSA) contemplates that the company will implement a restructuring either through i) a sale of all, substantially all, or one or more subsets of its assets, known as the Sale Scenario, or ii) the equitization of Sungard’s prepetition funded debt through a chapter 11 plan, known as the Equitization Scenario.