Fitch Downgrades Covanta & Subsidiary Ratings to 'BB-'; Withdraws Ratings

NEW YORK--()--Fitch Ratings has downgraded the Long-term Issuer Default Rating (IDR) of Covanta Holding Corporation (CVA) and Covanta Energy Corporation (CEC) to 'BB-' from 'BB'. Fitch has revised the Rating Outlook to Stable from Negative for both companies. The ratings of CVA and CEC have been withdrawn as the ratings are no longer considered by Fitch to be analytically relevant to the agency's coverage. A complete list of rating actions follows at the end of this release.

Credit metrics for CVA and CEC have continuously weakened due to higher maintenance expenses and lower margins on renewal of expiring waste management and energy sale contracts. Aging equipment, declining metal prices, and ongoing exposure to low waste and energy prices further stress credit protection measures under Fitch's conservative rating case assumptions. Fitch's rating case assumptions include low margins from spot electricity and recycled metal sales, higher than normal generating assets maintenance expenses, and low waste volume growth over next three years. Rating concerns include an aggressive shareholder distribution policy and elevated capex.

KEY RATING DRIVERS

Weakening Metrics: Fitch estimates funds from operations (FFO) based leverage will weaken and remain between 5.5x and 6.0x through 2016. Meanwhile, EBITDAR-to-interest coverage ratios are expected to fall to around 3x by the end of 2016. Rising equipment maintenance costs, higher capex, and low metal prices are among the main reasons for the weakening credit protection measures.

Increasing Exposure to Market Risks: Power prices have been adversely affected by low peak-demand and natural gas prices, which Fitch expects to persist in the near-to-intermediate term. In addition, a significant portion of Covanta's electricity generation volume will be rolling off lucrative long-term electricity sales contracts over next three years. Covanta also faces similar pricing environment for its waste management contracts that will be up for renewal over next three years. The new contracts are expected to be for a shorter duration than the previous contracts and will expose the Company frequently to the market based pricing.

Increasing Operating Costs: Higher maintenance costs and increased unscheduled outages at CEC's aging generating assets will continue to weigh on future cash flow, in Fitch's opinion.

Environmental Regulations May Challenge Future Cash Flow: Costs incurred to comply with MACT rules is recoverable under existing contractual arrangements, however, application of MACT rule to biomass plants will still result in addition costs for CVA. In addition to the MACT Rule, the PM2.5 Rule (Ambient Air Quality Standards from fine particulate matter) will be a factor in the future expansions and equipment replacement decisions, in Fitch's opinion.

Stable Outlook: Sustainable Cash Flows from Waste Processing with high quality counter parties -- mainly municipalities and local governments support the Stable Outlook. These contracts not only provide cash flow sustainability, but also improve visibility over the rating horizon. In addition, manageable debt maturities and available liquidity, through 2016, also support the Stable Outlook.

Strong Liquidity: Cash and cash equivalents totaled $198 million at Dec. 31, 2013. Additional liquidity includes $519 million available under a $900 million revolving credit facility. Covanta primarily uses its revolver to support letters of credit (LOCs) as well as for general corporate purposes. As of Dec. 31, 2013, Covanta had $271 million in LOCs outstanding under its revolver and $110 million in borrowings. The company's debt maturity through 2016 are manageable with the partial prefunding of its 2014 debt maturities with the issuance of $400 million 5.875% unsecured notes.

Fitch has downgraded and withdrawn the following ratings:

Covanta Holding Corporation (CVA)

--Long-term IDR to 'BB-' from 'BB';

--unsecured tax-exempt bonds to 'BB' from 'BB+';

--Senior unsecured debt to 'BB-'from 'BB'.

Covanta Energy Corporation (CEC)

--Long-term IDR to 'BB-' from 'BB';

--Senior secured debt to 'BB+' from 'BBB-'.

The Rating Outlook is revised to Stable from Negative.

RATING SENSITIVITY

Positive: An upgrade of CVA and its subsidiary, CEC, is considered unlikely given their credit profile.

Negative: Future developments that may, individually or collectively, lead to a lower rating include:

--Decline in the credit metrics, with EBITDAR/interest expenses remaining below 2.5x and adjusted debt/FFO ratio remaining above 6x on a sustainable basis.

--Additionally, new environmental rules or changes to the regulatory framework adversely affecting cash flows and a leveraged acquisition will also lead to a lower rating.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824593

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Contacts

Fitch Ratings
Primary Analyst
Roshan Bains, +1 212-908-0211
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Chad Walker, +1 312-368-2056
Associate Director
or
Committee Chairperson
Ralph Pellecchia, +1 212-908-0586
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Roshan Bains, +1 212-908-0211
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Chad Walker, +1 312-368-2056
Associate Director
or
Committee Chairperson
Ralph Pellecchia, +1 212-908-0586
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com