Sept 5 – Fitch Ratings has assigned a rating of ‘BBB’ to Waste Management
Inc.’s (WM) senior unsecured note offering. The $500 million notes will
mature in September 2022 with the majority of the proceeds to be used
to pay down the $400 million, 6.375% notes due in November 2012. WM’s Issuer
Default Rating (IDR) is ‘BBB’ with a Stable Outlook. A full list of ratings
follows at the end of this release.
WM’s ratings are supported by the company’s strong free cash flow, the
predictable nature of the industry, and WM’s position as the largest integrated
waste services company in the U.S. WM continues to maintain good financial
flexibility, with adequate cash and revolver availability and a manageable debt
maturity schedule. Following the repayment of the 6.375% notes due in November
2012, there are no significant maturities until 2014. Leverage as of June 30,
2012 was 2.9x, a slight increase from 2.7x a year ago, but still considered
appropriate for the rating given WM’s steady cash flow and actions to reduce its
cost structure.
The waste services operating environment remains mixed. Tough competition and
weak municipal finances represent headwinds for pricing. Despite the
competition, most players in the industry are maintaining discipline with core
prices continuing to rise, albeit at a slow pace. Stabilizing volumes have led
WM to state that it could be more aggressive about increasing pricing in the
back half of the year, though any margin benefits would not be expected until at
least 2013.
Waste volumes appeared to bottom near the end of 2011, having seen modest
increases in the first two quarters of 2012. This is the first notable rise in
volume since 2005. The largest improvements have come from higher levels of
industrial and special waste, which are coming off of recession lows. Fitch
expects waste volumes for the year to be roughly flat with 2011, as growth in
the back half of the year could be constrained by the weak economic environment.
In spite of the mixed operating environment, WM continues to generate steady
operating results. Margins have fallen over the past 18 months, primarily due to
the integration of Oakleaf and higher materials costs. Margins are expected to
remain pressured through the rest of 2012 because of weak pricing for recycled
newspaper and cardboard. However, ongoing cost cutting and efficiency
initiatives are expected to produce noticeable improvements within the next 2-3
years.
Free cash flows (FCF) are consistently positive and predictable. Fitch expects
the company to generate between $200 – 300 million in free cash in 2012, down
from $508 million in 2011. Lower FCF forecasts incorporate an increased
dividend, higher cash taxes, and higher capital expenditures related to the
purchase of compressed natural gas (CNG) trucks. FCF could increase beyond 2012
as capital expenditures moderate.
Liquidity remains more than adequate. As of June 30, 2012 WM had a cash balance
of $237 million supplemented by roughly $700 million in availability under its
revolver.
What Could Trigger a Rating Action
Positive: Future developments that may, individually or collectively, lead to a
positive rating action include;
–A sustained reduction in leverage to near or below 2.5x
–Cost reduction initiatives or a significant improvement in the market
environment which result in notable improvements to operating margins and free
cash flow.
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include;
–A material increase in leverage to fund shareholder returns
–A large, debt-funded acquisition.
Fitch currently has the following ratings on Waste Management, Inc.:
–IDR ‘BBB’,
–Senior Unsecured Credit Facility ‘BBB’,
–Senior Unsecured Debt ‘BBB’.
