TEXT-Fitch affirms Republic Services ratings
July 31 - Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Republic Services (NYSE: RSG) at 'BBB'. The Rating Outlook is Stable. Concurrently Fitch has withdrawn the ratings for Allied Waste Industries Inc. and Allied Waste North America following the redemption of the last remaining Allied notes in June of this year. A full rating list is shown below. Republic's ratings are supported by the company's consistent free cash generation, improved debt profile, strong operating margins, and its position as the second largest operator in a stable industry. Despite a mixed operating environment, Republic continues to produce solid results, generating stable margins and positive free cash flow in each of the past three years. The company has also refinanced the majority of the high-yield debt acquired in the 2008 acquisition of Allied Waste, significantly reducing annual interest expenses and smoothing its debt maturity profile. Conditions in the solid waste industry remain mixed. The pricing environment is highly competitive driven by aggressive bidding from smaller competitors and weak municipal finances. Core prices are rising, albeit at a slower than normal pace. The second half of the year should show some improvement from the lagging effects of automatic contract adjustments based on higher inflation rates in 2011. Despite the environment Republic remains focused on ROIC. The company has maintained pricing discipline, showing a willingness to walk away from contracts with unattractive margins. Fitch expects bidding to remain competitive, but pricing discipline should provide support for operating margins in the near term. Waste volumes for the year are expected to be flat with 2011, after several consecutive years of declines. Volumes remain at low levels, but no longer appear to be falling. RSG saw its first volume increase in several years in the first quarter of 2012 on improvement in construction and industrial activity. However, the rest of the year may not to keep pace with the first half, as some construction activity was pulled forward due to the unusually mild winter. The weak economic environment will continue to pressure residential and commercial volumes. After refinancing $750 million of 6.875% notes in June of 2012, RSG has largely eliminated the high yield debt acquired with the purchase of Allied. Further debt reduction is unlikely in the near term, and leverage is expected to remain near current levels for the foreseeable future. Debt/EBITDA was 2.9x as of June 30th, which is considered appropriate for the rating due to the stability of the industry and RSG's ability to generate cash. Leverage is now at a level where the company is comfortable returning cash to shareholders. Share repurchases resumed in earnest in 2011, after two years of minimal activity following the Allied acquisition. The company repurchased $460 million in shares in 2011 and is expected to spend in excess of $300 million per year in 2012 and 2013. RSG also announced a 7% dividend increase along with its second quarter 2012 earnings. This follows a 10% increase in the third quarter of 2011. Dividend payments in 2011 totaled $309 million. Fitch expects RSG to generate roughly $300 million in free cash flow in 2012, down from $521 million in 2011. Lower free cash flow primarily incorporates higher cash taxes resulting from the reversal of bonus depreciation, and payments related to the 2011 settlement of a tax dispute with the IRS. Lower FCF also incorporates the potential for an increased dividend. The company should continue to generate solid free cash flow after 2012, reflecting expectations of modest organic growth and a reduced cash impact from working capital. What could trigger a rating action: Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --A change in RSG's cash deployment strategy prioritizing debt reduction over shareholder friendly activity; --If Debt/EBITDA were to approach levels maintained prior to the Allied merger, near 2.0x. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --An increase in debt to fund share repurchases or dividends; --A large debt-funded acquisition. Neither of these scenarios are anticipated at this time. Fitch has affirmed the ratings as follows: Republic Services, Inc. --IDR at 'BBB'; --Senior unsecured bank credit facilities at 'BBB'; --Senior unsecured long-term debt at 'BBB' Browning-Ferris Industries --IDR at 'BBB' --Senior unsecured rating at 'BBB' Fitch has withdrawn the following ratings: Allied Waste Industries, Inc. --IDR 'BBB'. Allied Waste North America --IDR 'BBB'; --Senior unsecured rating 'BBB'.
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