Fitch Ratings has assigned a rating of 'BBB-' to the two series of new senior unsecured notes issued by Republic Services, Inc. (RSG) in a private placement. The two series are comprised of $850 million of 10-year notes and $650 million of 30-year notes. Fitch expects proceeds from the new notes will be used to fund the company's redemption of $425 million of 6.125% senior notes due 2014 that was announced on Feb. 5, 2010, as well as the redemption of $600 million of 7.25% senior notes due 2015 that was announced on March 1, 2010. Both series of notes to be redeemed were issued by RSG's Allied Waste North America (AWNA) subsidiary. In addition to the redemption of the two series of AWNA notes, Fitch expects proceeds from the new notes also will be used to pay down amounts outstanding on the company's receivables secured loans and its bank credit facilities. 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 the company's merger with Allied Waste Industries, Inc. (AW) in December 2008. RSG has made substantial progress on debt reduction since that time, however, with debt declining by over $700 million in 2009. Fitch expects the company to continue to look for opportunities to reduce its debt in 2010 as leverage reduction remains a top priority for free cash flow deployment.
Although volumes declined in 2009 as a result of the U.S. recession, improved pricing, cost discipline and merger synergies drove an increase in RSG's operating margin, which, when adjusted for non-recurring items, was 18.5% in 2009 versus 16.7% in 2008 (assuming the merger with AW had been in effect for the full year in 2008). Leverage (debt/EBITDA) declined to 2.8 times (x) at year-end 2009 versus 3.1x at the end of 2008 (including AW's EBITDA for all of 2008) due to the aforementioned debt reduction. Free cash flow (calculated as net cash from operations, less capital expenditures and dividends) was $282 million in 2009, and the company ended the year with total liquidity of nearly $900 million, including $48 million in cash and cash equivalents and over $800 million in revolver availability. Fitch estimates that free cash flow in 2010 will decline to the $250 million to $275 million range (according to Fitch's method of calculation) due to a $125 million cash tax settlement with the IRS that was paid in January 2010. However, although free cash flow will be lower, it still should be sufficient to allow the company to opportunistically reduce leverage this year.
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 projections and if the company continues to demonstrate a focus on leverage reduction. On the other hand, the Outlook could be revised back to Stable if progress toward 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, an earlier-than-expected restart of the company's share repurchase program before the company reaches at least a mid-2x leverage level could mark a significant change in management philosophy regarding debt reduction that could result in a revision of the Outlook back to Stable.
RSG's ratings reflect the application of Fitch's current criteria, which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Corporate Rating Methodology', (Nov. 24, 2009);
--'Liquidity Considerations for Corporate Issuers', (June 27, 2007).
Additional information is available at 'www.fitchratings.com'.
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