Fitch Affirms Waste Connections at 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Waste Connections, Inc.'s (WCN) Issuer Default Rating (IDR) and debt ratings of 'BBB' on its unsecured credit facility, unsecured term loan and senior unsecured notes. The Rating Outlook is Stable. The ratings cover approximately $3.7 billion of debt as of June 30, 2016. A full rating list is included at the end of this release.

KEY RATING DRIVERS

WCN's credit profile is supported by its particularly strong free cash flow (FCF) generation for its rating, adequate liquidity and moderate leverage, all of which provide the company with significant financial flexibility. The company's strategy of eschewing highly competitive urban markets to focus on maintaining strong defensive positions in smaller, secondary markets has led to consistently strong profitability and cash generation. Consistent with its secondary market focus, WCN derives a notably higher proportion of its revenue from franchise and exclusive markets compared to its larger competitors, which provides the company with more predictable revenues and profitability tied to these contracts. Further underpinning WCN's ratings is its disciplined capital deployment strategy, evidenced by its commitment to finance the merger with Progressive Waste Solutions Ltd. (Progressive) without incremental pro forma leverage.

Fitch expects WCN's pro forma total debt/EBITDA to be approximately 2.9x for FY2016, driven by roughly $4.1 billion in sales, $50 million in post-merger SG&A synergies and an EBITDA margin of approximately 31% for the new combined company. WCN's debt/EBITDA was 3.0x for FY2015 while Progressive's leverage was 3.25x over the same period. Fitch further expects WCN to generate roughly 5% of organic growth in 2016 driven by strong solid waste volume growth and pricing improvements. Fitch expects WCN's FCF (after dividends) margin to be north of 13% in 2017 driven by strong profitability, accelerated depreciation and deferred tax assets. Fitch further expects the FCF margin to rise steadily through the intermediate term.

On Jan. 19, 2016, WCN announced that it had entered into a definitive agreement to merge in an all-stock transaction with Progressive. The transaction was unanimously approved by both companies' Boards of Directors and closed as of June 1, 2016. Among the several value-creating opportunities that WCN management has identified within Progressive's operations are improved pricing discipline from the sales effort, reducing employee turnover, a shift toward managing to forward projections, and culture-driven improvements to such items as safety and continuous process improvement. WCN noted that through 2Q16, the contribution and operational improvements at legacy Progressive were ahead of expectations.

Rating concerns include WCN's exposure to the more volatile petroleum exploration and production (E&P) sector. In 3Q15 the company took a $411 million impairment related to intangible assets in its E&P segment. The company retains roughly $1 billion of E&P related assets on its balance sheet as of June 30, 2016. The risk that the E&P sector poses to WCN is limited by the fact that the segment now represents only 3% of pro forma revenue and EBITDA following the Progressive transaction.

Additional concerns include the potential for significant cash costs related to environmental clean-up at landfills, volatile commodity revenues from recycling, the potential for augmented cash returns to shareholders and frequent acquisition activity.

WCN has successfully outpaced its competitors with respect to volume growth in recent history. The industry as a whole has gained more discipline since the financial crisis and shifted focus toward more profitable volume, showing a willingness to shed low-margin business at the time of contract renegotiations. WCN, however, while maintaining industry-leading operating margins, has seen the strongest volume growth in the sector among large publicly traded firms, with aggregate price and volume growth of 4.8% in 2015. This was largely driven by its favorable contract mix, as Fitch estimates that roughly 50% of the pro forma business is derived from longer-term municipal contracts.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--$50 million in SG&A synergies will be realized in 2016;

--An EBITDA margin north of 31% beginning in 2017;

--Depreciation and amortization expense of roughly 14% of revenue through the intermediate term;

--Capital expenditures of roughly 10.5% of revenue through the intermediate term;

--An anticipated full-year effective tax rate of roughly 30% in 2016.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--A significant decrease in the proportion of the company's business tied to E&P waste;

--Reducing leverage (total debt/Fitch-calculated EBITDA) to below 2.5x for an extended period;

--A sustained increase in the company's cash liquidity to above $50 million.

Negative: Future developments that may, individually, or collectively, lead to a negative rating action include:

--A change in financial policy that results in leverage increasing above 3.25x for a sustained period;

--A steep decline in the free cash flow margin to below 3%;

--An adverse environmental development at a landfill that leads to significant liquidity pressure;

--A significant operational setback in the merger integration process resulting in significant liquidity pressure.

LIQUIDITY

WCN retains strong liquidity levels and Fitch expects the company to generate over $300 million of FCF in FY2016; in addition, the firm had a cash balance of $56 million as of 2Q16. WCN also recently entered a new $3.2 billion credit agreement consisting of revolving advances up to an aggregate principal amount of $1.52 billion. The company had $846 million of availability under the revolving line net of drawings and letters of credit outstanding as of 2Q16. The new credit agreement matures in June of 2021.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Stable Outlook:

--IDR at 'BBB';

--Unsecured revolving credit facility at 'BBB';

--Unsecured term loan at 'BBB';

--Senior unsecured notes at 'BBB'.

Additional information is available at www.fitchratings.com

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010532

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010532

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/20160818005984/en/

Fitch Ratings
Primary Analyst
Akin Adekoya
Director
+1-212-908-0312
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
or
Committee Chairperson
Sharon Bonelli
Senior Director
+1-212-908-0581
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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