Fitch Rates Republic Services' Proposed Notes 'BBB'
Proceeds from the proposed notes will be used to fund RSG's tender of four long-dated senior unsecured notes. On June 6, 2016, RSG launched cash tender offers to purchase up to $600 million in combined aggregate principal amount of the following notes in order of priority: the 6.200% notes due in 2040, the 5.700% notes due in 2041, the 7.400% notes issued by RSG's subsidiary Browning-Ferris Industries due in 2035, and the 6.086% notes due in 2035. The company has financed the premium and fees associated with the tender on its credit facility with the goal of paying off the revolver draw in advance of the new bond maturity. Fitch expects the revolver draw to be approximately $160 million and annual interest expense savings to be approximately $13 million pre-tax or $8 million net of tax.
KEY RATING DRIVERS
RSG's ratings are supported by its consistently strong free cash flow (FCF) generation, stable operating profile, strong market position within the waste disposal business, and stable credit metrics. Fitch views the company's tender offer positively as it reduces the duration of its outstanding debt obligations resulting in a meaningful reduction in RSG's cost of capital while retaining the financial flexibility, as the pro forma weighted average tenor of RSG's notes will remain above 10 years.
Ratings 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. Fitch notes, however, that most of these concerns are generally consistent across the environmental services industry and are not necessarily specific to RSG.
Fitch expects FCF to remain relatively solid over the intermediate term, with full-year 2016 FCF in the $500 million to $600 million range. Fitch also expects cash deployment to remain in line with previous expectations, focusing on capital investments, dividends, acquisitions and share repurchases. RSG has remained disciplined with respect to the size of its share repurchases and Fitch expects this to continue.
Fitch's key assumptions within its rating case for RSG include:
--Revenue growth over the intermediate term in the low single digits;
--Modest margin expansion as the company realizes benefits from its operating initiatives;
--Relatively steady capital expenditures running between $900 million and $1 billion annually;
--The company continues to pursue small bolt-on acquisitions each year;
--Relatively steady debt levels as the company refinances future maturities;
--Moderate dividend growth each year;
--Excess cash not needed for acquisitions is deployed toward share repurchases.
Positive: Future developments that may, individually or collectively, lead to 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 over shareholder-friendly activities.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Leverage rising to 3.25x or higher for a prolonged period;
--An inability to rebound from a period of FCF pressure to a FCF margin of 2%-3%;
--An increase in debt funded share repurchases or dividends;
--A large debt-funded acquisition that results in an elevated reset of the company's leverage target.
RSG's financial flexibility is adequate. As of 1Q16, the company had $33 million in cash and equivalents, augmented by $1.26 billion in aggregate revolver capacity (after accounting for outstanding letters of credit). Fitch further expects the company to have 2016 year-end cash and equivalents of roughly $30 million, in line with recent history. In addition, the company has no significant near-term debt maturities, as its two primary revolving credit facilities mature in May 2018 and June 2019 and none of its outstanding unsecured notes mature prior to 2018.
Fitch currently rates RSG and its Browning-Ferris Industries subsidiary as follows:
Republic Services, Inc.
--Long-Term IDR at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
--IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlook for both entities is Stable.