Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) at 'BBB'
for Republic Services Inc. (RSG) and at '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. The ratings cover approximately $7.7 billion of debt as of June
30, 2016.
KEY RATING DRIVERS
RSG's ratings are supported by the reoccurring revenue of its multi-year
contracts, solid operating leverage in addition to its strong and
predictable free cash flow. RSG benefits from a fully national platform,
long-lived landfill network and suitable management of its capital
structure. Of late the company has consistently generated incremental
pricing growth despite a sluggish macroeconomic environment and tepid
CPI growth. RSG's credit profile is further enhanced by the firm's
continued improvements in cost savings initiatives, improved customer
segmentation capabilities and fleet modernization.
Fitch expects RSG to maintain leverage consistent with current levels
over the intermediate term as the firm's DEBT/EBITDA was 2.9x through
Q2-2016. In addition the firm had an FFO Adjusted Leverage ratio of 3.8x
through the same period, and Fitch expects this ratio to remain
consistent through the intermediate term. RSG has maintained a reliable
cash deployment strategy over recent years, and Fitch expects the firm
to deploy approximately $900 million toward capital investment and $420
million toward dividends in 2016. RSG generated a FCF (after dividends)
margin of 2.8% through Q2-2016 on an LTM basis, but Fitch expects the
company to produce a 4.5% FCF margin for FY-2016, an increase from the
3.7% generated in 2015.
Rating concerns include the potential for significant cash costs related
to environmental clean-up at landfills, volatile recycling commodity
revenues, significant cash returns to shareholders and frequent
acquisition activity. Many of these concerns are generally consistent
across the environmental services industry and are not necessarily
specific to RSG.
In Q2-2016 RSG tendered $576 million of combined aggregate principal of
senior unsecured notes and debentures, funded with a $500 million note
offering and borrowings under the firm's credit facilities. Fitch views
the tender offer positively as it reduces the duration of the firm's
outstanding debt obligations resulting in a meaningful reduction in its
cost of capital while retaining financial flexibility, as the pro forma
weighted average tenor of RSG's debt remains above 10 years.
RSG's fleet modernization initiatives have progressed rapidly in recent
years with 73% of the company's residential vehicles now automated. In
addition 17% of the fleet has completed the compressed natural gas (CNG)
conversion, benefiting from the lower fuel cost. The company has a goal
of reaching 30% of the fleet operating on CNG within three to five
years. The ultimate proportion of CNG vehicles is somewhat limited by a
necessary proximity to natural gas pipelines and refuelling stations.
KEY ASSUMPTIONS
--Low single-digit revenue growth through the intermediate term;
--EBITDA margin in the 28% range through the intermediate term;
--Approximately $100 million in tuck-in acquisitions in 2016;
--Capital expenditures of roughly $900 million in 2016;
--Common dividends of roughly $420 million in 2016;
--Share repurchases of roughly $400 million in 2016.
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.
LIQUIDITY
RSG's liquidity level should remain adequate as Fitch expects the
company to generate approximately $400 million of FCF (after dividends)
for FY-2016. The company had $1.7 billion in aggregate revolver
availability ($2.25 billion less $485 million of outstanding letters of
credit) and held $42 million of cash on its balance sheet as of June 30,
2016. In May 2016, the company entered into a new $1 billion unsecured
revolving credit facility replacing the previous facility of the same
size that was set to mature in May of 2017. The new facility matures in
May of 2021 and includes a $500 million accordion feature. RSG has an
additional $1.25 billion unsecured credit facility which also features a
$500 million accordion feature and matures in June of 2019.
FULL LIST OF RATING ACTIONS
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'.
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
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010396
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010396
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160815006026/en/
Copyright Business Wire 2016