Moody's Upgrades Casella Waste Systems (CWST) to 'B2'; Outlook is Stable
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Moody's Investor Services (Moody's) upgraded Casella Waste Systems, Inc.'s (Nasdaq: CWST) Corporate Family Rating (CFR) to B2 from B3 and the Probability of Default Rating to B2-PD from B3-PD. At the same time, Moody's affirmed Casella's Speculative Grade Liquidity Rating at SGL-3. The rating outlook is stable.
Concurrent with these rating actions, Moody's assigned B1 ratings to Casella's proposed $150 million revolving credit facility and $350 million term loan B, the proceeds of which will be used to pay off the company's existing asset-backed lending (ABL) facility (unrated) and senior subordinated notes (Caa1). Upon funding of the new credit facility, Moody's expects to withdraw the Caa1 rating on the subordinated notes. Additionally, the placement of the proposed senior secured instruments in the capital structure will result in a three-notch downgrade to Caa1 from B1 of the unsecured waste disposal revenue bonds that Casella guarantees. The downgrades reflect the secured credit facility's priority status as well as the elimination of a significant amount of junior debt that previously provided first-loss cushion in the event of default to the unsecured bonds.
Casella's B2 CFR reflects an improving but still elevated leverage position (debt-to-EBITDA near 5.5x), weak EBIT-to-interest coverage (below 1x) and modest scale with a regional focus. Nonetheless, the upgrade acknowledges the company's steady progress in de-risking its credit profile and reflects Moody's expectation for this positive momentum to continue as it executes its ongoing strategic initiative implemented in late 2012. Operational improvements including sourcing incremental waste volumes to its landfills as the Northeast experiences a supply-demand disposal imbalance, heightened focus on pricing collection operations in excess of inflation, collection route efficiencies and the implementation of a new fee structure for the recycling operations continue to drive higher returns and cash flow generation. Accordingly, Moody's anticipates debt-to-EBITDA to approach 5x and EBIT-to-interest to comfortably exceed 1x by the end of 2017.
Additionally, paying off the higher-coupon subordinated notes will result in meaningful interest expense savings, improving interest coverage and boosting free cash flow, while installing pre-payable debt as the largest component of the capital structure.
Casella's liquidity profile is adequate as denoted by the SGL-3 rating. The modest cash position is supported by improving free cash flow generation that is being driven by stronger margins - year-over-year pricing growth in the collection and disposal lines of business - and capital expenditures settling into the waste industry average of approximately 10% of revenues. The proposed $150 million revolving credit facility will replace the $190 million ABL, with approximately $72 million drawn at closing. After netting posted letters of credit, revolving availability will be roughly $52 million, consistent with available liquidity prior to the proposed refinancing. Moody's expects availability to steadily increase through 2017 with the application of free cash flow to the outstanding revolver balance. The new cash flow revolver is expected to include standing maintenance covenants of maximum net leverage with step-downs and minimum interest coverage with step-ups.
The stable outlook reflects Moody's expectations for modest but steady revenue growth over the next 12-24 months driven by stronger collection pricing and rising tipping fees as a result of reduced landfill capacity in the Northeast US. The majority of expected free cash flow - approximately $20 million in 2016 and over $25 million in 2017 - is anticipated to be utilized to pay down the revolving credit facility and term loan, meaningfully reducing leverage, with a secondary focus on tuck-in acquisitions.
Profitable expansion of the company's operating footprint beyond New England and New York could lead to a ratings upgrade. Additionally, debt-to-EBITDA below 4.5x, free cash flow-to-debt in the mid-single digits and EBIT-to-interest approaching 2x could result in upward rating pressure. A material decline in revenues, free cash flow turning negative for an extended period of time, debt-to-EBITDA remaining above 5.5x or a material erosion in the liquidity position could lead to a downgrade.
Moody's took the following rating actions on Casella Waste Systems, Inc.:
- Corporate Family Rating, to B2 from B3
- Probability of Default, to B2-PD from B3-PD
- Speculative Grade Liquidity, SGL-3
Rating outlook is Stable
- Senior Secured Revolving Credit Facility, at B1 (LGD3)
- Senior Secured Term Loan B, at B1 (LGD3)
Rating expected to be withdrawn upon funding of the proposed credit facility:
- Subordinated Notes, at Caa1 (LGD5)
Ratings expected to be downgraded upon funding of the proposed credit facility:
- New York State Waste Disposal Revenue Bonds Series 2014, to Caa1 (LGD5) from B1 (LGD2)
- New York State Waste Disposal Revenue Bonds Series 2014-R2, to Caa1 (LGD5) from B1 (LGD2)
- State of New Hampshire Waste Disposal Revenue Bonds Series 2013, to Caa1 (LGD5) from B1 (LGD2)
- State of Maine Waste Disposal Revenue Bonds Series 2005-R2, to Caa1 (LGD5) from B1 (LGD2)
- State of Maine Waste Disposal Revenue Bonds Series 2015, to Caa1 (LGD5) from B1 (LGD2)
- State of Vermont Waste Disposal Revenue Bonds Series 2013, to Caa1 (LGD5) from B1 (LGD2)
The principal methodology used in these ratings was Environmental Services and Waste Management Companies published in June 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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