CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Waste Management, Inc.'s (WM) Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is Stable. A full rating list is included at the end of the release. The ratings apply to WM's $2.25 billion senior unsecured credit facility and to roughly $6.3 billion of senior unsecured notes.
KEY RATING DRIVERS
The ratings are supported by WM's strong cash flow generation, leading market position within the environmental service industry, stable credit metrics, and consistent capital deployment strategies. Fitch expects WM to manage its capital structure and capital deployment plans within its current financial strategy of maintaining solid liquidity alongside stable leverage (Total Debt/Fitch adjusted EBITDA) around 3.0x compared to current leverage of 2.76x as of June 30, 2014. 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.
Fitch believes the recently announced $1.94 billion Wheelabrator divestiture will provide long-term benefits to both the operating and credit profile. The transaction is likely to stabilize top line growth by reducing WM's exposure to volatile energy prices and improving its operating margins by approximately 25-50 bps in the upcoming 12-24 months. Divestitures in 2014 are expected to total $2.2 billion and focus on non-core businesses and geographies, a trend Fitch views positively for both WM and the broader environmental services industry. Fitch believes the long-term trends in the environmental services industry will provide stable cash flow generation, while a focused business plan for the company's core business should provide further benefits.
Fitch expects WM's capital deployment plans going forward to be focused on organic and inorganic growth, followed by shareholder friendly activities. WM expects to receive cash proceeds of $1.85 billion following the Wheelabrator transaction by year-end 2014. WM expects to remain leverage neutral at approximately 3.0x following the divestiture, which suggests that debt repayment would be in the range of $300-500 million, depending on the level of acquisition activity within the upcoming 6-12 months. Debt repayment is likely to focus on revolver borrowings that funded a $600 million accelerated share repurchase (ASR) plan and possibly the $350 million senior unsecured notes maturing in March 2015. Fitch expects any additional proceeds remaining following acquisitions and debt repayment will fund further share repurchases.
The environmental services industry largely provides stable cash flow generation and strong financial flexibility. Fitch expects WM's 2014 free cash flow (FCF) (cash flow from operations less capital expenditures and common dividends) to be approximately $400-500 million compared to $501 million in 2013. The slightly lower FCF is largely due to higher cash taxes and certain one-time charges related to specific divestitures. Going forward, FCF will likely benefit from the Wheelabrator divestiture as capital expenditures are focused more on core services. Fitch expects capital spending to continue to a more normalized level of approximately 9% of consolidated revenues.
Pricing trends within the environmental services industry have been favorable following the downturn, especially for the larger operators like WM. Fitch expects pricing trends to remain strong, with overall average yield growing in the 1.5-2.0% range, largely driven by open market pricing gains offsetting below average CPI-based contracts. WM has been proactive following an updated pricing strategy announced in 2013 focused on increasing ROIC on each contract. WM is an industry leader with regards to service, which is leading customers to accept price increases.
Although Fitch views WM's pricing strategy favorably and believes future benefits will continue to be realized, volumes have been negatively affected. Municipal contracts and national accounts have been the largest drivers of negative volume in 2013 and 2014. Fitch expects volumes to be slightly improved in 2015, with no large contract or account losses, while some customers have returned to WM after experiencing service issues with other operators.
Rating concerns are generally focused on strategy, both financial and operating. Following the 2014 divestitures, WM has returned to a more core environmental services company. Fitch views this as a long-term positive, however WM has made non-core acquisitions in the past, and this continues to be a potential rating concern. A change in the company's financial strategy could potentially pressure financial flexibility, given the industry's capital intensity and WM's capital deployment plans going forward.
Financial flexibility remains strong. As of the end of the second quarter, WM had total liquidity of $1.4 billion, consisting of $137 million in cash and $1.3 billion in availability under its primary revolving line of credit ($2.25 billion less $105 million in borrowings and $874 million in letters of credit). Subsequent to the second-quarter end, the company funded its $600 million ASR with revolver borrowings. Fitch expects WM to maintain a revolver balance in the near term while it decides on the final uses of the Wheelabrator divestiture proceeds. Long-term cash is expected to range between $100-150 million.
WM's debt maturity schedule is well-staggered and manageable, with the only significant upcoming maturity consisting of a $350 million unsecured note coming due in March 2015, which may be repaid with Wheelabrator proceeds. Going forward, Fitch expects WM to have the ability to address its debt maturities with either FCF or through its consistent access to the capital markets.
RATING SENSITIVITIES (Fitch Forecasts in parentheses)
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 5% (FY14: 3.0%);
--A change to a more conservative financial strategy.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Leverage reaching 3.25x for a prolonged period;
--Inability to rebound from a period of FCF pressure to a FCF margin of approximately 2-3%;
--Debt funded share repurchases or dividends or a large debt funded acquisition;
--A change to a less conservative financial strategy.
Fitch has affirmed WM's ratings as follows:
Waste Management, Inc.
--IDR at 'BBB',
--Senior Unsecured Credit Facility at 'BBB',
--Senior Unsecured Debt at 'BBB'.
The Rating Outlook is Stable.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage