Fitch Rates Waste Connections' Notes 'BBB'

CHICAGO--()--Fitch Ratings has assigned a rating of 'BBB' to Waste Connections' (WCN) $750 million issuance of 5-year, 7-year, and 10-year senior unsecured notes in addition to its new $3.2 billion senior unsecured credit facility which features a $1.65 billion term loan and a $1.55 billion revolver. The Issuer Default Rating (IDR) for WCN is 'BBB'. The Rating Outlook is Stable.

Proceeds from the notes will be used to term out revolver borrowings and for general corporate purposes. The notes will be issued in the private placement market under a supplement of the company's existing Master Note Purchase Agreement. The notes will be issued in three tranches: $150 million 2.39% notes due in 2021, $200 million 2.75% notes due in 2023, and $400 million 3.03% notes due in 2026. The notes will rank pari passu with both the $825 million of existing notes that will remain outstanding under the Master Note Agreement and obligations under the company's new $3.2 billion senior unsecured credit facility.

On Jan. 19, 2016, WCN announced that it had entered into a definitive agreement to merge in an all-stock transaction with Progressive Waste Solutions Ltd. (Progressive). The transaction has been unanimously approved by both companies' Boards of Directors and has closed as of Jun. 1, 2016. The merger combines the third and fourth largest North American waste management services companies.

KEY RATING DRIVERS
Fitch expects WCN's pro forma total debt/EBITDA to be approximately 3x for FY2016, driven by roughly $4 billion in sales, $50 million in post-merger SG&A synergies and an EBITDA margin of approximately 30% for the new combined company. WCN's debt/EBITDA was 3x for FY2015 while Progressive's leverage was 3.25x over the same period. Fitch further expects WCN to generate roughly 5% of organic growth in 2016 driven by recent improvements in the solid waste segment which generated 9% and 21% revenue growth in the collection and disposal segments, respectively, over prior year in first quarter 2016 (1Q16).

Rating concerns include WCN's exposure to the more volatile petroleum exploration and production (E&P) sector. In 1Q16 WCN reported E&P waste revenue down 55% from the prior year. The company has revised its FY E&P revenue estimates downward by $40 million. Fitch also remains concerned about continued weakness in the recycling segment, as revenue declined by an additional 5% compared to prior year in 1Q16, though this is mitigated as recycling only represented 2% of the firm's revenue in the period.

KEY ASSUMPTIONS
--The merger with Progressive will not result in any material near-term net debt issuance;
--All Progressive debt, save for $64 million of Industrial Revenue Bonds, will be retired at closing;
--The combined company will generate at least $1.25 billion in pro forma EBITDA in 2016;
--$50 million in SG&A synergies will be realized in 2016:
--An anticipated full-year effective tax rate of 30%.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--A significant decrease in the proportion of the company's business tied to E&P waste;
--Reducing leverage (total debt/Fitch-calculated EBITDA) to below 2.5x for an extended period;
--A sustained increase in the company's cash liquidity to above $50 million.

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

--A change in financial policy that results in leverage increasing above 3.25x for a sustained period;
--A steep decline in the free cash flow (FCF) margin to below 3%;
--An adverse environmental development at a landfill that leads to significant liquidity pressure;
--A significant operational setback in the merger integration process resulting in significant liquidity pressure.

LIQUIDITY
WCN benefits from a strong liquidity position as Fitch expects the company to generate north of $450 million in pro forma FCF (after dividends) in 2016 corresponding with a FCF margin in the 11% to 12% range. Fitch expects the company to have approximately $1 billion in revolver availability at the end of 2016. As part of the merger the new credit facility will be used to refinance and consolidate both WCN's $1.2 billion outstanding revolver and term loan borrowings in addition to Progressive's $1.5 billion in credit facility debt outstanding as of Dec. 2015. The combined company will utilize the single new $3.2 billion senior unsecured credit facility going forward.

Fitch currently rates WCN as follows:

--IDR 'BBB';
--Unsecured revolving credit facility 'BBB';
--Unsecured term loan 'BBB';
--Senior unsecured notes 'BBB'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Jan. 19, 2016

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005445
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Akin Adekoya
Director
+1-212-908-0312
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Brown
Senior Director
+1-312-606-2302
or
Committee Chairperson
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Akin Adekoya
Director
+1-212-908-0312
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Brown
Senior Director
+1-312-606-2302
or
Committee Chairperson
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
alyssa.castelli@fitchratings.com