Fitch Affirms Republic Services' IDR at 'BBB'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) at 'BBB' for Republic Services Inc. (RSG) and '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.

KEY RATING DRIVERS

RSG's ratings are supported by consistent strong free cash flow (FCF) generation, a stable operating profile, leading market position within the waste disposal business and stable credit metrics. Though RSG just took on incremental borrowing in March 2015 associated with the Tervita acquisition, Fitch expects leverage to remain relatively close to the 3.25x level over the intermediate term. As of LTM March 31, 2015, leverage (Debt / EBITDA) stood at 3.22x. Fitch considers RSG's leverage to be appropriate for the 'BBB' rating, given the company's consistent operating results and cash flow generation.

The current pricing environment remains favorable for waste operators, especially for the largest operators. RSG is the second-largest operator within the extremely competitive waste disposal business. During first quarter 2015 (1Q15), the company's revenue increased by 4.4% over prior year and the average yield increased to 2.1% versus 1.2% during 1Q14. Increased volume was responsible for 1.9% of the revenue increase driven by growth in the large container industrial collection and landfill lines of business. The increased volume in the landfill line of business was primarily due to increased construction and demolition, special waste and municipal solid waste volumes. Recycled commodities decreased revenue by 1.0% through March 31, 2015, primarily due to lower commodity prices, partially offset by an increase in production volumes.

Fitch anticipates volume to be a secondary focus to pricing, since RSG strategically avoids low-profit-margin contracts; however, volumes will remain a major top-line growth driver. Fitch expects single-family housing starts to improve over 2015, which is a leading indicator for waste volumes. Recent operating performance has largely been in-line with Fitch's expectations when adjusting for environmental remediation charges, with EBITDA margins in the 28% range on an adjusted basis. RSG continues to realize efficiencies from recent initiatives such as an increased number of compressed natural gas (CNG) trucks, increased fleet automation (currently 69% of RSG's residential routes have been converted to single-driver automated trucks), and the near-completion of the 'One Fleet' initiative. The One Fleet initiative will standardize maintenance for all Republic vehicles, allowing for an increasing average age while decreasing long-term capital expenditures.

FCF is expected to remain strong in 2015 despite expected increased shareholder activities. The company has guided a growing capital expenditure figure after several years of decreasing capex partially driven by increasing capital costs from increased solid waste regulatory requirements. The increased capex is also driven by increased containers, higher facility costs and growing landfill-related expenditures. As of March 31, the company has $134 million of available cash, $128 million of FCF generated during the first three months of 2015 and $1.68 billion of availability under its two credit facilities in aggregate.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for RSG include:

--4%-5% revenue growth in 2015;

--EBITDA margin in the 28% range (adjusting for Bridgeton environmental remediation charges);

--Capex in accordance with the company's stated three-year plan commencing with $885 million in 2015 climbing to $949 million by 2017;

--Common dividends of $400 million in 2015 with incremental increases thereafter.

RATING SENSITIVITIES

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.

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'.

Browning-Ferris Industries

--IDR at 'BBB';

--Senior unsecured notes at 'BBB'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988235

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988235

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150720006390/en/

Fitch Ratings
Primary Analyst
Akin Adekoya, +1-212-908-0312
Director
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Secondary Analyst
Stephen Brown, +1-312-368-3139
Senior Director
or
Committee Chairperson
Craig D. Fraser, +1-212-908-0310
Managing Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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