Fitch Ratings has assigned a rating of 'BBB-' to the $600 million in new 5.25% senior unsecured notes due 2021 issued by Republic Services, Inc. (NYSE: RSG) in a private placement. Proceeds from the notes will be used to fund the company's redemption of $450 million of 7.875% senior notes due 2013 issued by RSG's Allied Waste North America (AWNA) subsidiary and a portion of its redemption of $230 million of 4.25% senior subordinated convertible debentures due 2034 issued by RSG's Allied Waste Industries, Inc. (AW) subsidiary. The Issuer Default Rating (IDR) for RSG is 'BBB-', and the Rating Outlook is Positive.
RSG's ratings reflect the solid waste collection and disposal company's significant free cash flow generation potential and financial flexibility, offset somewhat by a heavy debt load following last year's merger with AW. However, over the past three quarters, RSG has reduced its outstanding consolidated debt by over $600 million, and Fitch expects debt to decline further throughout the next several years as leverage reduction continues to be the company's top priority for free cash flow deployment.
In addition to leverage reduction, RSG is focused on smoothing its maturity profile, which has significant peaks in 2011, 2013 and 2014. In September 2009, the company tendered for a total of $325 million in outstanding principal on four series of notes, three of which will mature in 2011. Although RSG issued new notes to fund the tender offer, it nonetheless reduced 2011 maturities from over $1.1 billion to an estimated $917 million. In 2013, RSG has another $1.1 billion of debt slated to mature, but the redemption of the 7.785% notes will help to reduce maturities in that year to an estimated $689 million. Maturities in 2014 total over $800 million, and Fitch expects the company may also seek opportunities to pare its obligations in that year, as well.
Although the recession has caused a decline in RSG's waste volumes over the past year, the company has managed to grow its margins through a combination of improved pricing and cost discipline. The company's liquidity position at the end of the third quarter of 2009 was strong, with $107 million in cash and cash equivalents and a total of $1.1 billion available on its two revolving credit facilities. RSG also had $85 million of available capacity on its receivables secured loan facility. Despite the weaker volumes, Fitch expects RSG to produce free cash flow (calculated as net cash from operations, less capital expenditures and dividends) of between $200 million and $250 million this year, growing to more than $250 million in 2010, which will help the company in its drive to reduce leverage. Fitch also expects the company to continue seeking opportunities to smooth its debt maturity profile, so it could re-enter the capital markets from time to time over the next 12 to 24 months to undertake additional refinancing transactions. Nonetheless, Fitch continues to expect that any new debt ultimately will be more than offset by debt reduction until RSG's leverage reaches the low 2 times (x) range, which would be consistent with the company's pre-merger credit profile.
RSG's ratings could be upgraded within the next 18 months if the company's pricing remains strong, volumes do not worsen materially from current levels and the company continues to demonstrate meaningful progress toward leverage reduction. On the other hand, RSG's Rating Outlook could be revised back to Stable if the pace of de-leveraging slows, either due to a substantial further weakening in operating conditions or a change in the company's emphasis on debt reduction. In particular, a restart of the share repurchase program prior to attainment of the company's low-2x leverage goal could mark a significant change in management philosophy that could result in a revision of the Rating Outlook back to Stable.
Additional information is available at 'www.fitchratings.com'.
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.
Contacts:
Fitch Ratings, Chicago
Stephen Brown, 312-368-3139
William
Warlick, 312-368-3141
or
Media Relations:
Cindy Stoller,
212-908-0526, New York
Email: cindy.stoller@fitchratings.com
