Fitch Affirms Republic Services' (RSG) IDRs; Outlook Remains Stable
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Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) at 'BBB' for Republic Services Inc. (NYSE: RSG) and at 'BBB' for Browning-Ferris Industries Inc. (BFI). Fitch has also affirmed RSG's unsecured credit facility and senior unsecured notes ratings as well as BFI's senior unsecured notes rating at 'BBB'. The Rating Outlook for RSG and BFI is Stable. The ratings cover approximately $7.7 billion of debt as of June 30, 2016.
KEY RATING DRIVERS
RSG's ratings are supported by the reoccurring revenue of its multi-year contracts, solid operating leverage in addition to its strong and predictable free cash flow. RSG benefits from a fully national platform, long-lived landfill network and suitable management of its capital structure. Of late the company has consistently generated incremental pricing growth despite a sluggish macroeconomic environment and tepid CPI growth. RSG's credit profile is further enhanced by the firm's continued improvements in cost savings initiatives, improved customer segmentation capabilities and fleet modernization.
Fitch expects RSG to maintain leverage consistent with current levels over the intermediate term as the firm's DEBT/EBITDA was 2.9x through Q2-2016. In addition the firm had an FFO Adjusted Leverage ratio of 3.8x through the same period, and Fitch expects this ratio to remain consistent through the intermediate term. RSG has maintained a reliable cash deployment strategy over recent years, and Fitch expects the firm to deploy approximately $900 million toward capital investment and $420 million toward dividends in 2016. RSG generated a FCF (after dividends) margin of 2.8% through Q2-2016 on an LTM basis, but Fitch expects the company to produce a 4.5% FCF margin for FY-2016, an increase from the 3.7% generated in 2015.
Rating concerns include the potential for significant cash costs related to environmental clean-up at landfills, volatile recycling commodity revenues, significant cash returns to shareholders and frequent acquisition activity. Many of these concerns are generally consistent across the environmental services industry and are not necessarily specific to RSG.
In Q2-2016 RSG tendered $576 million of combined aggregate principal of senior unsecured notes and debentures, funded with a $500 million note offering and borrowings under the firm's credit facilities. Fitch views the tender offer positively as it reduces the duration of the firm's outstanding debt obligations resulting in a meaningful reduction in its cost of capital while retaining financial flexibility, as the pro forma weighted average tenor of RSG's debt remains above 10 years.
RSG's fleet modernization initiatives have progressed rapidly in recent years with 73% of the company's residential vehicles now automated. In addition 17% of the fleet has completed the compressed natural gas (CNG) conversion, benefiting from the lower fuel cost. The company has a goal of reaching 30% of the fleet operating on CNG within three to five years. The ultimate proportion of CNG vehicles is somewhat limited by a necessary proximity to natural gas pipelines and refuelling stations.
--Low single-digit revenue growth through the intermediate term;
--EBITDA margin in the 28% range through the intermediate term;
--Approximately $100 million in tuck-in acquisitions in 2016;
--Capital expenditures of roughly $900 million in 2016;
--Common dividends of roughly $420 million in 2016;
--Share repurchases of roughly $400 million in 2016.
Positive: Future developments that may individually or collectively cause Fitch to take a positive rating action include:
--Maintaining leverage below 2.0x, similar to levels seen prior to the Allied Waste acquisition;
--FCF margins consistently greater than 4%;
--A change in the cash deployment strategy, prioritizing debt reduction over shareholder-friendly activities.
Negative: Future developments that may individually or collectively cause Fitch to take a negative rating action include:
--Leverage rising above 3.5x for a prolonged period;
--Sustained FCF margins below 2%;
--A significant increase in debt-funded share repurchases or dividends;
--A large debt-funded acquisition that results in an elevated long-term leverage target.
RSG's liquidity level should remain adequate as Fitch expects the company to generate approximately $400 million of FCF (after dividends) for FY-2016. The company had $1.7 billion in aggregate revolver availability ($2.25 billion less $485 million of outstanding letters of credit) and held $42 million of cash on its balance sheet as of June 30, 2016. In May 2016, the company entered into a new $1 billion unsecured revolving credit facility replacing the previous facility of the same size that was set to mature in May of 2017. The new facility matures in May of 2021 and includes a $500 million accordion feature. RSG has an additional $1.25 billion unsecured credit facility which also features a $500 million accordion feature and matures in June of 2019.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Republic Services, Inc.
--IDR at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
--IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
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