CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating for Synagro-Baltimore LLC's (Synagro) $25.6 million ($4.35 million outstanding) tax-exempt series 2008 A revenue refunding bonds, which were issued on behalf of Synagro by the Maryland Industrial Development Financing Authority. The Rating Outlook is Stable.
RATING RATIONALE
The rating reflects Synagro's strong financial performance, which is anchored by the steady receipt of fixed contractual revenues and a history of stable operations. Synagro's debt service coverage ratios (DSCRs) exceed 1.6x in a Fitch rating case that incorporates higher expenses and reduced operational performance. The rating also incorporates potential exposure to the credit quality of Synagro Technologies Inc. (STI), Synagro's parent.
KEY RATING DRIVERS
Stable revenue profile. Revenue Risk: Midrange - Synagro's cash flows are primarily derived from a fixed price service agreement with the city of Baltimore, a highly rated municipality. Synagro is not exposed to volumetric or price risks, as the agreement is structured as a put-or-pay contract with guaranteed minimum payments. The agreement provides substantial flexibility if a facility experiences an outage, and tipping fees are only reduced in extreme circumstances.
Low operational risk. Operation Risk: Midrange - 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. In recent years, throughput has fallen well below the facilities' respective maximum capacities. The high proportion of reimbursable expenses under the service agreement limits the potential for higher O&M costs to impact cash flows, though management service fees may be charged to the project at the sponsor's discretion.
Manageable capital expenditure profile. Infrastructure/Renewal Risk: Stronger - Fitch does not anticipate that Synagro will incur non-routine maintenance costs prior to the maturity of the bonds, and the project is not required to make specific capital improvements under the service agreements. The capacity of the facilities appears sufficient to meet Synagro's contractual obligations.
Standard Debt Structure. Debt Structure: Midrange - The senior secured, fixed-rate bonds fully amortize throughout the debt's tenor, reaching maturity in Dec. 2016. Bond holders benefit from a letter of credit funded debt service reserve of approximately $2.5 million. Fitch expects DSCRs to remain level through the maturity of the debt.
Consistent financial performance: Synagro has historically maintained a stable cost profile that has combined with fixed contractual revenues to provide level operating margins. The projected level of financial performance is consistent with the current rating across Fitch's stress scenarios, including an extended outage at one of the facilities. DSCRs average more than 1.6x in a Fitch rating case that contemplates both higher expenses and reduced availability.
Parent Exposure. Ownership & Sponsors: Weaker - The potential risk of consolidation arising from parent exposure concerns STI's administrative practices with respect to Synagro prior to the issuance of the bonds. STI and Synagro have since amended their relationship such that Synagro is organized as a bankruptcy-remote, special-purpose vehicle. Favorably, Synagro was not consolidated in STI's 2013 bankruptcy proceedings.
RATING SENSITIVITIES
--Negative: Parent financial distress - A further bankruptcy or financial distress at the STI level that leads to litigation by STI's creditors could have a negative impact on the rating.
SECURITY
The rated debt is secured by a pledge of revenues under the service agreement and a first mortgage lien on the assets, contracts, and project accounts.
CREDIT UPDATE
The affirmation reflects Synagro's continued strong operating and financial performance. Fitch estimates that the project achieved a DSCR of 2.20x in 2013 and 1.9x for the year-to-date through Q3 2014. Revenues remained based upon minimum contractual volumes, and neither facility has recently encountered any operational difficulties. O&M costs are stable and Synagro has not incurred any unusual expenses.
Synagro expects that the Back River facility will contribute to future cash flows following the Dec. 31, 2014 expiry of Back River's service agreement. Back River is currently operating under a short term contract with Baltimore, and it is uncertain whether Synagro will establish a long-term agreement. Synagro estimates that Back River will generate EBITDA of $2.25 million per year.
Fitch expects that any contractual arrangement with Baltimore will allow Back River to earn positive margins, but the level of profitability is highly uncertain. The inclusion of Back River's cash flow could potentially improve DSCRs to 3.0x. Otherwise, projected DSCRs should remain consistent with historical performance due to the scheduled step down in debt service.
Synagro is a special purpose company created to own and operate two sludge processing facilities that provide disposal services to the city of Baltimore. Synagro's Patapsco facility operates under a service agreement, expiring in 2017, under which 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' (July 12, 2012);
--'Rating Criteria for Availability-Based Projects' (June 18, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Availability-Based Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710784
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=976475
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