NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on Waste Management, Inc.'s (WM) Issuer Default Rating (IDR), senior credit facility and senior unsecured notes at 'BBB'. The Rating Outlook is Stable. A full rating list is included at the end of the release. The ratings apply to approximately $9 billion in debt.
KEY RATING DRIVERS
WM's ratings are supported by its strong free cash flow (FCF), leading market position within the environmental services industry, stable credit metrics and consistent capital deployment strategies. Fitch expects WM to manage its capital structure and deployment plans within its current financial strategy of maintaining solid liquidity alongside leverage (total debt/Fitch adjusted EBITDA) in the mid-to-high 2x range (2.6x as of June 30, 2015). Given the stability of the environmental services industry, Fitch expects any deviation from this financial strategy to remain among the key rating drivers going forward.
Following the divestiture of its Wheelabrator waste-to-energy business in late 2014, WM has honed its focus on its core environmental service operations. The initial example of this shift in strategy was the acquisition of Deffenbaugh Disposal Inc. in March of 2015 for $416 million ($413 million in cash). Prior to the acquisition, Deffenbaugh was one of the largest privately owned, solid waste collection and disposal firms in the Midwest and following certain divestitures required by the U.S. Department of Justice, Deffenbaugh is expected to contribute approximately $176 million of third party revenue and $52 million of operating EBITDA annually. Fitch views WM's re-focus on solid waste positively as it reduces the firm's exposure to volatile energy prices and improves the margin profile.
Fitch expects WM's capital deployment plans going forward to be focused on organic growth in its more profitable segments (industrial, commercial and landfills), inorganic growth primarily focused on solid-waste targets, followed by shareholder friendly activities. Fitch expects WM leverage to increase moderately, likely peaking in the vicinity of 3.0x over the intermediate term as the company deploys capital in acquisitions to replace the roughly $200 million in EBITDA from Wheelabrator and other recent divestitures. Fitch expects (Fitch defined) FCF to be adequate in 2015, despite the top-line and commodity pricing pressures, likely not declining materially from the nearly $500 million in FCF generated in 2014.
Pricing trends have been positive in the more profitable industrial and commercial business segments with each line of business posting about 270 basis points of volume improvement in the second quarter (2Q) over the prior year. WM has also recently been successful in winning new business in the industrial and commercial segments with new awards outpacing lost business.
Rating concerns include a potential shift in operational and financial strategy or a continued commodity price compression. WM's shift back to a core environmental services company is a credit positive; however, the company has made non-core acquisitions in the past, and this continues to be a potential ratings concern. Given the industry's capital intensity and WM's capital deployment plans going forward, credit metrics could be strained depending on the timing of acquisitions and appetite for debt-funded buybacks.
Financial flexibility remains strong. As of the end of the 2Q, WM had approximately $1.7 billion of total liquidity, consisting of $273 million in cash and $1.4 billion in availability under its primary revolving line of credit ($2.25 billion less $830 million in letters of credit). Long-term cash is expected to range between $100 million-$150 million.
After prepaying $947 million worth of senior notes and tender offers for another $1 billion in senior notes in the first six months of 2015, WM has a manageable debt maturity profile over the next several years. The company has a $500 million maturity in September of 2016, the maturity of its Canadian credit facility in November 2017 ($162 million drawn as of June 30, 2015) and a $600 million note maturity in March of 2018. Fitch expects WM to have the ability to address its debt maturities with either FCF or through consistent access to the capital markets.
KEY ASSUMPTIONS
--Falling revenue over the intermediate term;
--Flat EBITDA margins as restructuring benefits and improved pricing are offset by weak commodity pricing;
--EBITDA leverage increases from the current level to fund acquisitions in the intermediate-term;
--Annual capital expenditures in the 9% to 10% of revenue range;
--The company continues to invest moderately in acquisitions each year;
--Dividends grow modestly on an annual basis;
--The company retains about $100 million in cash on its balance sheet, with excess cash targeted toward share repurchases.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Maintaining leverage (total debt/Fitch adjusted EBITDA) below 2.5x for a prolonged period;
--FCF margin consistently greater than 4%;
--A change to a more conservative financial strategy.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Leverage above 3.25x for a prolonged period;
--FCF lower than 1.5% (or 2% excluding cash outflow from minority distributions) for a prolonged period;
--Debt funded share repurchases, dividends or a large debt funded acquisition;
--A change to a less conservative financial strategy.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with, a Stable outlook:
Waste Management, Inc.
--IDR at 'BBB';
--Senior unsecured revolving credit facility rating at 'BBB';
--Senior unsecured notes rating at 'BBB'.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 28 May 2014 - 14 August 2015 (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989502
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989502
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.