OREANDA-NEWS. Fitch Ratings has downgraded Waste Italia SpA's (WI) Long-term Issuer Default Rating (IDR) to 'CC' from 'CCC' and its senior secured notes' rating to 'C' from 'CCC'. The Recovery Rating of the notes is 'RR5'.

The downgrade reflects stressed liquidity through 2016, a decline in landfill capacity below rating guidelines, weaker operating performance with assumed further delay in new capacity due to permitting and funding constraints and recent management change. Parent company Gruppo Waste Italia SpA (GWI) provided bridge financing to help meet the coupon payment on the senior notes in November 2015, but a merger with indebted Biancamano in 2017 may affect shareholder support over the longer term.

KEY RATING DRIVERS
Stressed Liquidity
Based on our estimate of cash generation, Fitch expects that the company may need to procure additional factoring facilities beyond those available at end-February 2016 or obtain bridge financing from GWI to meet the EUR10.5m coupon payment on the senior secured notes due on 15 May 2016. The company received EUR1m in bridge financing from GWI (ex Kinexia SpA) to meet the EUR10.5m coupon payment last November. GWI, which held readily available cash of EUR5m at 30 June 2015, indicated last year that it would provide the company with bridge financing to cover its needs if necessary. However, there are no written commitments to this effect.

The company also needs to make a mandatory cash repayment of EUR5m to holders of the senior secured notes due at the latest on 29 May 2016. As owner of 44% of GWI, Sostenya Group plc purchased EUR5m of the notes in October 2015. WI and its advisors are currently negotiating with investors a potential waiver of the mandatory cash repayment. However, the repurchased bonds were not cancelled, the legal situation is unclear and we do not assume that the repurchase would offset the repayment. Liquidity is likely to remain stressed through 2016 with an additional coupon payment of EUR10.5m and potential acquisition of Lafumet for EUR3.5m, both due in November 2016.

WI appointed financial advisors Banca Leonardo in association with Houlihan Lokey in February 2016 to conduct a strategic review of the capital structure in view of the upcoming obligations. The advisors have completed a review of the business plan, but are still reviewing the capital structure.

Decline in Landfill Capacity
The useful life of remaining landfill capacity at end-2015 of 3.246bn cu m has fallen to 3.4 years, slightly below our negative rating guideline of 3.5. Unless new capacity is authorised, capacity would be exhausted before maturity of the bond principal in November 2019. The most important extension project, Chivasso3/Wastend, passed the initial stage of the permitting process in November 2015, but permitted additional capacity has been lowered by nearly 30% to 750,000cu m. In view of stressed liquidity, Fitch believes that funding capex for projects such as Chivasso3 remains challenging beyond ordinary annual maintenance capex of EUR11m.

Weaker Operating Performance
The Italian market for waste treatment is highly fragmented, putting competitive pressure on small sized companies in a context of weak GDP growth, and this broadly characterised WI's experience of waste collection in 2015. Fitch expects WI to report a fall in underlying 2015 EBITDA of around 19%. Based on slower growth in collection volumes and softer pricing, including landfill, than previously, we are lowering 2016-18 annual EBITDA estimates by an average of 25% compared with the last rating action in October 2015. This also reflects our view that, given permitting and funding constraints, new capacity is delayed by a year at Chivasso3 to 2018 and at Verde Imagna to 2019. This is a more conservative assumption than management.

Management Change, Corporate Governance
CEO Enrico Friz resigned in January 2016, and was replaced by Flavio Raimondo, the third CEO in a year. It remains to be seen if further management change has an impact on this year's results.

GWI plans to merge with Biancamano, which does not trigger the change of control covenant in WI's senior secured notes, have been postponed to end-2016. Post merger, GWI has plans for a capital increase of EUR10m-EUR30m. However, given that net debt at Biancamano is currently EUR114m (versus 9M15 EBITDA of EUR5.9m), Fitch believes that a more heavily indebted parent company may be in a weaker positon to give WI financial support in future.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for WI include:
- Additional landfill capacity is delayed at Chivasso 3 to 2018 (from 2017) and at Verde Imagna to 2019 (from 2018)
- Collection volumes grow at an annual average for 2016-19 of 3% vs. 4.5% previously
- Average prices of EUR108/t in 2016 and EUR112/t in 2017, slightly below previous estimates, on continued competitive pressures
- Adjusted EBITDA margins of 30% in 2016, before declining as high-margin landfill capacity falls, until 2018 when Chivasso3 comes on-stream, restoring margins to 30%-34%

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Improved liquidity and recurring earnings leading to a more sustainable capital structure.
- Sustained operational improvement, including timely landfill permitting as planned.
- Expected FFO adjusted net leverage sustainably below 5.5x, FFO interest coverage above 2.0x

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Further weakening of the liquidity position, expectation of failure to service debt, including through the formal announcement of a distressed debt exchange.

Rating guidelines may be subject to revision once the outcome of the capital structure review is known.