Date: May 30, 2008
Source: Fitch Ratings
Fitch Revises Allied Waste's Outlook to Positive; Affirms IDR at 'B+'
Fitch Ratings has affirmed the following ratings of Allied Waste Industries, Inc. (NYSE: AW) and its Allied Waste North America (AWNA) and Browning-Ferris Industries (BFI) subsidiaries, as follows:
Allied Waste Industries (AW):
Issuer Default Rating (IDR) at 'B+';
Senior unsubordinated at 'CCC+/RR6'
Allied Waste North America (AWNA):
Issuer Default Rating (IDR) at 'B+'
Secured credit facility rating at 'BB+/RR1';
Senior unsecured rating at 'B/RR5';
Browning-Ferris Industries (BFI):
Issuer Default Rating (IDR) at 'B+'.
In addition, Fitch has upgraded the ratings of AWNA's and BFI's senior secured notes and debentures to 'BB+/RR1' from 'BB/RR2'. The rating for AW's preferred stock, which had been 'CCC+/RR6', has been withdrawn, as the company's preferred shares have been automatically converted to common shares. Fitch's ratings apply to approximately $6.2 billion in debt and a $1.6 billion secured revolving credit facility. The Rating Outlook has been revised to Positive from Stable.
The ratings for AW, along with its AWNA and BFI subsidiaries, reflect ongoing improvement in the non-hazardous waste services company's credit profile as it allocates free cash flow toward leverage reduction. Although industry volumes have declined somewhat as the U.S. economy has weakened, the pricing environment remains strong, and expectations are that margins should continue to expand over the near to medium term. AW's free cash flow could be constrained somewhat in 2008, however, as the company plans to make a total of $351 million in payments to the Internal Revenue Service (IRS) this year in order to slow the accrual of interest on an outstanding tax payment that is currently in dispute. AW paid $196 million to the IRS in the first quarter, with the remaining $155 million expected to be paid later in the year.
AW's volumes in 2008 are expected to decline between 1.5% and 3.0% overall due largely to the slowing U.S. economy. The company's roll-off container business and construction and demolition landfill volumes are expected to be particularly weak, along with some slowing of commercial collection volumes, as well. Pricing is generally expected to remain firm, however, with the company projecting a 4.5% increase in pricing in 2008. Pricing strength appears to be holding across the industry, as virtually all of AW's major competitors have transitioned to a focus on return on invested capital (ROIC) and margins, as opposed to volumes and market share when making pricing decisions. Recently, this has manifested itself most noticeably in stronger landfill pricing, which has, in turn, supported further increases in collection pricing, as landfills generally serve as the anchor for waste collection operations in a given location.
Over the past several years, AW has used its free cash flow to strengthen its balance sheet. Debt declined to $6.7 billion at March 31 from a high of over $11 billion immediately following its acquisition of BFI in 1999. In the past year, debt has declined by $331 million, resulting in an improvement in EBITDA leverage to 4.0x at March 31 from 4.5x at March 31, 2007. The reduction in debt and several refinancings have driven a decline in interest expense, as well, with EBITDA interest coverage improving to 3.6x from 2.6x over the same period. Although leverage reduction could slow somewhat in the near term as the company borrows from its secured revolver to temporarily fund a portion of the aforementioned IRS payments, over the longer term, AW is expected to continue focusing on debt reduction until its capital structure is closer to that of its investment-grade competitors. AW's liquidity remains strong, with $45 million in cash and equivalents, augmented by $1.0 billion in secured revolver availability at March 31.
The upgrade in the ratings of AW's senior secured notes and debentures reflects a decline in the level of secured debt outstanding over the past year. Although collateral coverage is stronger for the company's secured credit facility than for the secured notes and debentures, the combination of a reduction in outstanding term loan debt, which declined to $807 million at March 31 from $1.1 billion at March 31, 2007, as well as a decline in other secured debt to $4.3 billion from $4.6 billion over the same period, has improved the recovery prospects for holders of the company's secured notes and debentures. As a result, the rating for the secured notes and debentures has been upgraded to 'BB+/RR1' from 'BB/RR2'. Recovery prospects for holders of the company's senior unsecured notes and senior subordinated convertible debentures remain in-line with the existing ratings.
The Positive outlook recommendation reflects Fitch's expectation of ongoing improvement in AW's credit profile over the longer term. Industry fundamentals are expected to remain favorable, promoting ongoing margin improvement and free cash flow growth. AW's demonstrated focus on balance sheet repair is expected to result in further leverage reduction, despite the need for some near term revolver borrowing related to the planned IRS payments. Although the IRS payments made this year will lessen some of the concern regarding the disputes' potential impact on the company's future cash needs, unfavorable verdicts in either of the two outstanding IRS cases could still result in significant future cash payments, as well. However, a final resolution to either case is unlikely in the near term.
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