Moody's Raises Outlook on Casella Waste Systems (CWST) to Stable; Ratings Affirmed
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Moody's affirmed Casella Waste Systems, Inc.'s (Casella) B3 corporate family (CFR) and B3-PD probability of default ratings and revised the ratings outlook to stable from negative due to improved financial performance in recent quarters and Moody's expectation for modest additional improvement through fiscal year-ending April 2015. Moody's also affirmed the B2 ratings on the Maine Revenue bonds and Vermont Pollution Control bonds, and Caa1 rating on the subordinate notes.
Outlook Actions:
..Issuer: Casella Waste Systems, Inc.
....Outlook, Changed To Stable From Negative
Affirmations:
..Issuer: Casella Waste Systems, Inc.
.... Corporate Family Rating, Affirmed B3
.... Probability of Default Rating, Affirmed B3-PD
.... Speculative Grade Liquidity Rating, Affirmed SGL-3
....Senior Subordinated Regular Bond/Debenture Feb 15, 2019, Affirmed Caa1 (LGD5, 73%)
..Issuer: Maine Finance Authority
....Senior Unsecured Revenue Bonds Jan 1, 2025, Affirmed B2 (LGD3, 35%)
..Issuer: Vermont Economic Development Authority
....Senior Unsecured Revenue Bonds Apr 1, 2036, Affirmed B2 (LGD3, 35%)
RATINGS RATIONALE
Casella's B3 CFR reflect the company's weak financial profile, including high leverage (6.2x Adjusted debt/EBITDA for the twelve months ending October 31, 2013), below industry-average margins (21% EBITDA margins), and modest scale (about $480 million revenue). The company is regionally concentrated in New England and upstate New York and Pennsylvania, leaving the company vulnerable to local price competition and declines in demand for the company's solid waste collection and disposal services. In recent years, due to both challenging industry conditions and strategic decisions, Casella reported high single digit percent revenue declines and 200-300 basis point EBITDA margin erosion. However, in December 2012 the company reorganized its senior management ranks, rolling out a strategy which places greater revenue and margin generation responsibility on local managers instead of the main corporate office. Moody's expects the heightened focus on developing relationships with waste collectors and the more aggressive sales effort will continue driving revenue and margin improvements through fiscal year-ending April 2015. The company maintains a solid collection and disposal market share in its core markets and Moody's expects Casella would leverage a rebound in oil & gas drilling in Pennsylvania, should one develop.
The stable outlook reflects an expectation for about 5% revenue growth in the second half of 2014 due reflecting a full year of earnings from the December 2012 acquisition of BBI Waste and other small acquisitions, as well as improved market share. This will be followed by just under 3% revenue growth in 2015, roughly in line with our expectations for the overall solid waste sector coupled with modest acquisition expectation. Seasonal working capital and capex flows should drive 2H 2014 debt reduction leading to leverage below 6.0x; free cash flow driven debt reduction coupled with a modest EBITDA increase in fiscal 2015 should drive leverage closer to 5.0x
Expectation for leverage sustained below 5.0x, high single digit percent free cash flow to debt, and EBITDA margin close to 25% would like lead to a ratings upgrade. A resumption of revenue decreasing, free cash flow declining to $0, or uncured covenant violations would likely lead to a ratings downgrade.
Moody's views liquidity as adequate as denoted by the SGL-3 rating. The company had about $58 million available on the company's $227.5 million revolving credit facility (unrated) and $5 million unrestricted cash on the balance sheet as of October 31, 2013. Availability should improve somewhat as the most recent quarter is the tightest for liquidity based on seasonal capex. Upon closure of the company's share of the Greenfiber venture, few non-guarantee assets will remain, limiting alternative liquidity sources.
The principal methodology used in this rating was the Solid Waste Management Industry published in February 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Outlook Actions:
..Issuer: Casella Waste Systems, Inc.
....Outlook, Changed To Stable From Negative
Affirmations:
..Issuer: Casella Waste Systems, Inc.
.... Corporate Family Rating, Affirmed B3
.... Probability of Default Rating, Affirmed B3-PD
.... Speculative Grade Liquidity Rating, Affirmed SGL-3
....Senior Subordinated Regular Bond/Debenture Feb 15, 2019, Affirmed Caa1 (LGD5, 73%)
..Issuer: Maine Finance Authority
....Senior Unsecured Revenue Bonds Jan 1, 2025, Affirmed B2 (LGD3, 35%)
..Issuer: Vermont Economic Development Authority
....Senior Unsecured Revenue Bonds Apr 1, 2036, Affirmed B2 (LGD3, 35%)
RATINGS RATIONALE
Casella's B3 CFR reflect the company's weak financial profile, including high leverage (6.2x Adjusted debt/EBITDA for the twelve months ending October 31, 2013), below industry-average margins (21% EBITDA margins), and modest scale (about $480 million revenue). The company is regionally concentrated in New England and upstate New York and Pennsylvania, leaving the company vulnerable to local price competition and declines in demand for the company's solid waste collection and disposal services. In recent years, due to both challenging industry conditions and strategic decisions, Casella reported high single digit percent revenue declines and 200-300 basis point EBITDA margin erosion. However, in December 2012 the company reorganized its senior management ranks, rolling out a strategy which places greater revenue and margin generation responsibility on local managers instead of the main corporate office. Moody's expects the heightened focus on developing relationships with waste collectors and the more aggressive sales effort will continue driving revenue and margin improvements through fiscal year-ending April 2015. The company maintains a solid collection and disposal market share in its core markets and Moody's expects Casella would leverage a rebound in oil & gas drilling in Pennsylvania, should one develop.
The stable outlook reflects an expectation for about 5% revenue growth in the second half of 2014 due reflecting a full year of earnings from the December 2012 acquisition of BBI Waste and other small acquisitions, as well as improved market share. This will be followed by just under 3% revenue growth in 2015, roughly in line with our expectations for the overall solid waste sector coupled with modest acquisition expectation. Seasonal working capital and capex flows should drive 2H 2014 debt reduction leading to leverage below 6.0x; free cash flow driven debt reduction coupled with a modest EBITDA increase in fiscal 2015 should drive leverage closer to 5.0x
Expectation for leverage sustained below 5.0x, high single digit percent free cash flow to debt, and EBITDA margin close to 25% would like lead to a ratings upgrade. A resumption of revenue decreasing, free cash flow declining to $0, or uncured covenant violations would likely lead to a ratings downgrade.
Moody's views liquidity as adequate as denoted by the SGL-3 rating. The company had about $58 million available on the company's $227.5 million revolving credit facility (unrated) and $5 million unrestricted cash on the balance sheet as of October 31, 2013. Availability should improve somewhat as the most recent quarter is the tightest for liquidity based on seasonal capex. Upon closure of the company's share of the Greenfiber venture, few non-guarantee assets will remain, limiting alternative liquidity sources.
The principal methodology used in this rating was the Solid Waste Management Industry published in February 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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