Fitch Rates Waste Management's Senior Unsecured Notes 'BBB'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'BBB' to Waste Management Inc.'s (WM) proposed senior unsecured note offering. The $500 million in notes will mature in May 2023. WM's Issuer Default Rating (IDR) is 'BBB'/Stable Outlook.

The proposed issuance is to fund the upcoming maturity of the outstanding 2.6% senior notes in September 2016. The company also intends to temporarily pay down short-term borrowing under its U.S. revolving credit facility (RCF) which the company typically utilizes for working capital and short-term investments. Additionally, on Jan. 8, 2016 the company acquired the assets of Southern Waste Systems/Sun Recycling (SWS) for $525 million in an all-cash transaction. The acquisition was primarily funded with borrowings under WM's RCF. The acquired business assets include residential, commercial, and industrial waste collection as well as processing/recycling facilities, vehicles, real estate and customer agreements. SWS recognized revenues of $37 million and net income of $1 million for the quarter ended March 31, 2016.

KEY RATING DRIVERS

WM's ratings are supported by the company's strong free cash flow (FCF), the predictable nature of the industry, and WM's position at the largest integrated waste services company in the U.S. WM continues to maintain good financial flexibility, with adequate cash and revolver availability and a manageable debt maturity schedule. Following the repayment of the maturing notes due this coming September, the company has no significant maturities until 2018. Adjusted Debt/EBITDAR as of 1Q16 was 2.9x on an LTM basis, up slightly from 2.8x as of Dec. 31, 2015. Fitch expects WM's adjusted leverage to remain in the 2.6x to 3.0x range over the medium term.

The waste services operating environment has shown recent signs of improvement and WM experienced a 13% rise in municipal solid waste disposal volumes over prior year in addition to positive pricing movement across all segments in 1Q16. The stronger disposal volumes were mostly driven by increased commercial construction, housing starts and warm weather. The company also generated 4.5% revenue growth in 1Q16 which was the first quarter of top-line growth since 2014. Recent positive developments have been somewhat offset by the continued weakness in the recycling segment, as commodity prices were 12% lower compared to prior year, though recycling volumes did increase by 3% in the period.

KEY ASSUMPTIONS

--A soft revenue environment over the intermediate term;

--Flat EBITDA margins as restructuring benefits and improved pricing are offset by weak commodity pricing;

--Annual capital expenditures in the 9%-10% of revenue range;

--The company continues to invest moderately in acquisitions each year;

--Dividends grow modestly on an annual basis;

RATING SENSITIVITIES

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

--Maintaining leverage (total adjusted debt/EBITDAR) below 2.5x for a prolonged period;

--FCF margin consistently greater than 4%;

--A change to a more conservative financial strategy.

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

--Total adjusted debt/EBITDAR above 3.25x for a prolonged period;

--FCF lower than 1.5% (or 2% excluding cash outflow from minority distributions) for a prolonged period;

--Debt-funded shareholder-friendly activity;

--A change to a less conservative financial strategy.

LIQUIDITY

WM's FCF are consistently positive and predictable. Fitch expects the company to generate roughly $600 million in FCF, after dividends, in 2016. The company generated $570 million in FCF in 2015, which was 4.4% of revenue. WM held $104 million in cash and marketable securities and had approximately $1.8 billion available under its $2.25 billion RCF as of March, 31 2016. The company intends to remarket its $381 million of tax-exempt bonds with interest rate periods expiring within the next 12 months, though sufficient flexibility remains under its revolver to meet these obligations prior to successful remarketing.

FULL LIST OF RATING ACTIONS

Fitch currently rates WM as follows:

--IDR at 'BBB';

--Senior unsecured credit facility at 'BBB';

--Senior unsecured debt at 'BBB'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Aug. 13, 2015

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

Additional information is available at 'www.fitchratings.com'.

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

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004177

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/20160509005884/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
Monica Aggarwal
Managing Director
+1-212-908-1282
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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