CHICAGO--()--Fitch Ratings has taken the 'BBB+' rating of Synagro-Baltimore LLC's (Synagro) $25.6 million ($12.2 million outstanding) tax-exempt series 2008 A revenue refunding bonds off Negative Rating Watch, which had been placed on Aug. 12, 2012, and assigned a Stable Rating Outlook. Fitch has received previously unavailable financial data, which is now considered sufficient for an evaluation of Synagro's credit quality.
Key Rating Drivers
--Stable revenue profile: Synagro's cash flows are derived from fixed-price service agreements with the city of Baltimore, a highly rated municipality. Synagro is not exposed to volumetric or price risks, as the agreements are structured as put-or-pay contracts with guaranteed minimum payments. The agreements provide substantial flexibility if a facility experiences an outage, and tipping fees are only reduced in extreme circumstances.
--Low operational risk: The Synagro facilities incorporate highly redundant systems with relatively simple and proven technology. The facilities have been in service almost continuously since beginning commercial operations and have accumulated extensive operating histories. Historically, throughput has fallen well below the facilities' maximum capacities. The high proportion of reimbursable expenses under the service agreements limits the potential for higher operating and maintenance (O&M) costs to impact cash flows.
--Consistent financial performance: Synagro's cost profile is stable, though the sponsor's original projections did not include substantial management services fees. Debt-service coverage ratios (DSCRs) average more than 1.6x in a Fitch rating case that contemplates higher expenses and reduced availability. Synagro's projected financial performance remains adequate across the Fitch rating case and various stress scenarios, including an extended outage at one of the facilities.
--Parent exposure: The rating is based on Synagro's stand-alone credit profile but is limited by potential exposure to the credit quality of Synagro Technologies Inc. (STI), Synagro's parent and a deeply sub-investment-grade entity. The risk arising from the parent exposure concerns STI's past administrative practices with respect to Synagro. The project has been organized as a bankruptcy-remote, special-purpose vehicle, partially mitigating potential linkage to STI. Synagro is also vulnerable to potential volatility in STI's overhead costs, as management service fees may be charged to the project at the sponsor's discretion.
--Standard debt structure: Synagro's financing documents generally include terms and conditions that Fitch views as typical of similarly rated transactions. Notably, the flow of funds grants STI unusual discretion in the payment of operating expenses, though lenders maintain priority in the disbursement of cash receipts to pay debt service.
--Increasing operating costs: Greater than expected O&M expenses or
--Parent financial distress: Bankruptcy or financial distress at STI that leads to litigation by STI's creditors or an increase in management service fees above historical levels;
--Unfavorable regulation: More stringent biosolids regulation that results in higher compliance costs or capital expenditures.
The rated debt is secured by a pledge of revenues under the service agreements and a first mortgage lien on the assets, contracts, and project accounts.
Fitch has assigned a Stable Rating Outlook to Synagro's ratings and removed them from Rating Watch Negative, as Synagro has provided sufficiently detailed financial data that further clarifies the project's operating cost profile. Fitch has confirmed that Synagro has maintained stable O&M expenses, allowing the project to consistently achieve DSCRs in excess of 2.0x. Management fees, which represent a contractual charge for shared services provided by STI, are calculated as an allocation of STI's corporate overhead and will continue to represent an external risk factor outside of the project's control. Ongoing financial distress at STI may increase administrative expenses, and therefore Synagro's management fees, in the near term.
Fitch believes that Synagro's projected financial performance remains consistent with the current rating but has taken a more conservative view of Synagro's cost profile to account for potential cost volatility with respect to management fees. Fitch's base case, which extrapolates from Synagro's historical financial results, indicates that projected DSCRs should average more than 2.0x. Fitch's projections now include an explicit allowance for management fees and incorporate a higher level of routine capital expenditures. Favorable adjustments for certain non-cash accruals, primarily depreciation, generally offset the negative impact of management fees and capital expenditures.
Synagro is a special-purpose company created to own and operate two sludge-processing facilities that provide disposal services to the city of Baltimore under two service agreements expiring in 2014 and 2017. Baltimore has a contractual obligation to deliver a guaranteed minimum tonnage or pay service fees on the equivalent sludge volume. Synagro must process, and/or dispose of all sludge delivered to the facility by the city.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated July 12, 2012
--'Rating Criteria for Availability-Based Projects', dated June 19, 2012
Applicable Criteria and Related Research:
Rating Criteria for Availability-Based Projects
Rating Criteria for Infrastructure and Project Finance