Fitch Affirms Synagro-Baltimore LLC at 'BBB+'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating of Synagro-Baltimore LLC's (Synagro) tax-exempt series 2008 A revenue refunding bonds. The Rating Outlook is Stable. The bonds were issued by Maryland Industrial Development Financing Authority on behalf of Synagro.

The affirmation reflects Synagro's recent financial performance, which has exceeded Fitch's original base case projections. Synagro achieved a debt service coverage ratio (DSCR) of approximately 2.5 times (x) in 2009, and 2010 financial results through July 31 are consistent with the same period in the prior year. Despite operating challenges stemming from an accident at Synagro's Patapsco facility in April 2010, facility availability remains sufficient to meet contractual obligations under the service agreements with the city of Baltimore (the city). The Patapsco facility experienced less than one week of outage time due to the accident.

Synagro faces heightened exposure to potential operational disruptions at Patapsco, as redundant capacity is now unavailable. However, Fitch recognizes that the accident was an extraordinary event, and a similar incident is unlikely to re-occur in the near future. Patapsco's operating record is otherwise free from persistent problems or severe outages. Though the accident affected 50% of Patapsco's capacity, historical utilization of the facility has fallen below the 50% level. Fitch has no reason to believe sludge deliveries will significantly increase in the near term; Patapsco currently processes 100% of the sludge produced by the city's wastewater treatment plant. Synagro is currently evaluating several options to remedy the damage caused by the accident, and Fitch will continue to monitor the progress and cost of the repairs.

The rating is based on Synagro's projected financial performance under stress conditions. DSCRs remain at or above 1.7x in a Fitch rating case that contemplates higher expenses, reduced availability, and lower revenues from pellet sales. Synagro is not exposed to volumetric or price risks, as the service agreements are structured as put-or-pay contracts with guaranteed minimum payments provided by a highly rated municipality. The service agreements provide substantial flexibility if a facility experiences an outage, and tipping fees are only reduced in extreme circumstances. Fitch considers operating risks to be low. Each facility incorporates redundant systems, relatively simple proven technology, and established cost structures. Consequently, projected financial performance remains strong across various stress scenarios, including an extended outage at one of the facilities. The limited impact of the recent accident highlights Synagro's resilience to severe stressors.

Future rating actions are likely to be influenced by the following:

--Further reductions in facility availability could negatively affect contractual revenues. If Synagro is unable to process all sludge deliveries, the project would also incur additional disposal costs.

--Merchant exposure in the pellet market could lead to lower revenues and higher disposal costs. Pellet sales, which comprise less than 5% of total revenues, have historically provided Synagro with stable cash flow.

--Operating and maintenance costs (O&M) could increase over time. Apart from the capital expenditures necessary to restore Patapsco's capacity, Synagro's cost structure has not demonstrated a high degree of volatility.

--Synagro could be exposed to financial distress at its parent, Synagro Technologies, Inc. (STI). The risk arising from the parent exposure is linked to STI's past administrative practices with respect to Synagro, though Synagro is currently organized as a bankruptcy-remote, special-purpose vehicle. Furthermore, the project trustee does not control cash disbursement for O&M expenses, which are paid at the discretion of Synagro.

Additional information is available at 'www.fitchratings.com'.

Applicable criteria:

'Rating Criteria for Infrastructure and Project Finance', dated Aug. 13, 2010.

Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345

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