TEXT-S&P affirms Casella Waste Systems 'B' rating

Tue Sep 25, 2012 1:29pm EDT

Overview
     -- U.S.-based Casella Waste Systems Inc. (Casella) is repaying its $180 
million second lien notes with the proceeds from an add-on senior subordinated 
notes issuance and a planned equity offering.
     -- We affirmed the 'B' corporate credit rating on Casella. 
     -- We also placed the issue-level ratings on the company's senior 
subordinated notes and unsecured industrial revenue bonds on CreditWatch with 
positive implications.
     -- Casella is also amending its financial covenants for additional 
flexibility.
     -- The negative outlook reflects the continuation of challenging business 
conditions and Casella's highly leveraged capital structure.
 
Rating Action
On Sept. 25, 2012, Standard & Poor's Ratings Services affirmed its 'B' 
corporate credit rating on Rutland, Vt.-based Casella Waste Systems Inc. The 
outlook is negative. At the same time, we placed our ratings on the senior 
subordinated notes on CreditWatch with positive implications pending the 
completion of the company's proposed equity and proposed $135 million in new 
add-on senior subordinated notes. If the transactions are completed as 
proposed, we expect to raise the issue rating on the senior subordinated debt 
to 'B-' from 'CCC+' and revise the recovery rating to '5', from '6'. 

We also placed our ratings on the company's $21.4 million in unsecured 
industrial revenue bonds on CreditWatch with positive implications pending the 
completion of the company's proposed equity and new debt offering. The bonds 
were issued by the Finance Authority of Maine (FAME) in 2005 and are not 
supported by letter of credit. If the transactions are completed as proposed, 
we expect to raise the issue level ratings on these FAME bonds to 'BB-' from 
'B-' and revise the recovery ratings to '1' from '5'.


Rationale
The company plans to issue $135 million in new add-on senior subordinated 
notes, raise about $50 million of common equity, and utilize about $15 million 
in revolver borrowings to repay its $180 million second-lien notes and pay 
related fees and expenses. The company is also amending its financial 
covenants to provide increased cushion levels as part of this transaction. We 
expect the proposed financial covenant cushion levels related to total 
leverage and interest coverage will be above 10% after the completion of the 
proposed transaction.  

The ratings reflect our view of Casella's financial risk as "highly leveraged" 
marked by high debt balances and minimal free cash generation. As of July 31, 
2012, Casella had total adjusted debt-to-EBITDA of 5.7x and funds from 
operations (FFO)-to-total adjusted debt of 8.7%--at the current ratings, we 
expect levels of 5.5x to 6.0x and 10% to 15%, respectively. We view Casella's 
business risk profile as "fair", reflecting the company's participation in a 
recession-resistant industry, its competitive market positions in its 
operating regions, and generally good profitability despite its somewhat 
modest scale of operations. 

Casella is a vertically integrated provider of collection, recycling, 
transfer, and disposal services to residential, commercial, and industrial 
customers. Annual sales as of July 31, 2012, totaled $475 million, making it 
one of the larger regional solid waste haulers. The company operates 
predominantly in the northeastern U.S. and focuses on competing in secondary 
and tertiary markets. Casella occupies the largest or second-largest market 
position in about 80% of the markets it serves. The company derives roughly 
82% of its revenues from solid waste operations, with 10% coming from 
recycling assets and another 8% from major accounts. Within Casella's solid 
waste operations, collection accounted for 52% of segment revenue during the 
fiscal year ended April 30, 2012, followed by disposal (31%), processing and 
organics (14%), and power/landfill gas to energy (3%).

Casella's operating performance during its fiscal year ended April 30, 2012, 
improved modestly due to better collection pricing, increased tonnage at 
expanded landfills, and higher prices on recycled commodities for much of the 
year. Lower special waste tonnage, higher fuel costs, increased disposal and 
landfill operating costs, and the downturn in natural gas and energy pricing 
partially offset these strengths. The company's adjusted EBITDA margin for the 
2012 fiscal year was 24%, up slightly from 23% last year. For the past 12 
months ended July 31, 2012, the adjusted EBITDA margin was about 23%, and we 
expect the company will be able to maintain these levels through fiscal year 
2013 based on our scenario forecasts. However, we expect slightly negative 
revenue growth driven by lower special waste volumes and lower commodity 
prices in fiscal year 2013. This should result in fiscal-year 2013 EBITDA 
being about flat with fiscal year 2012.  

Our fiscal 2013 performance expectations for Casella include:

     -- Sales growth of negative 1% to 0%, driven by overall lower landfill 
volumes and commodities prices, partially offset by modest collection pricing 
and additional volumes from recently expanded landfills;
     -- Adjusted EBITDA margin of about 23%; and
     -- Free cash flow flat to slightly negative.
 
Liquidity
We classify Casella's liquidity as "adequate" (as our criteria define the 
term). After the proposed transaction, we expect about $100 million of 
availability under its unrated $227.5 million revolving credit facility due 
March 18, 2016, after adjusting for $30 million in letters of credit. Based on 
our scenario forecasts, we expect free cash flow to be neutral to slightly 
negative in fiscal year 2013 after about $50 million in capital expenditures 
and a modest use of cash for net working capital requirements. Large growth 
capital expenditures for landfill development have been largely completed, so 
we believe that most capital spending will be related to maintenance and 
should average about 10.5% of revenues--roughly in line with the industry 
average. After the completion of the transaction, debt maturities are 
manageable with the earliest maturity in 2016 when its revolving credit 
facility becomes due. We expect financial covenants related to total leverage 
and interest coverage to provide more than 10% in EBITDA cushion levels after 
the completion of the proposed transactions and amendment.

Our liquidity assessment reflects the following factors and assumptions:

     -- We believe sources of liquidity (including FFO; committed unused 
credit lines; and cash balances) will exceed uses by 1.2x during the next 
year; and
     -- Sources less uses of liquidity are likely to remain positive in the 
unlikely event of a 15% EBITDA decline.
 
Recovery analysis
For the complete recovery analysis, see our recovery report on Casella to be 
published after this report on RatingsDirect.

Outlook
The outlook is negative. We could lower the ratings if economic weakness, 
price competition, or adverse movements in recycled commodities or fuel prices 
cause earnings or cash flow to deteriorate, so that the company cannot 
maintain FFO-to-total adjusted debt of 10% to 15%.  

However, we believe Casella could stabilize its credit risk profile by 
demonstrating improved operating performance in subsequent quarters or by 
divesting noncore assets and using the proceeds to reduce debt. We believe the 
company remains committed to reducing debt (as evidenced by pending equity 
offering and its use of asset divestiture proceeds in 2011 to repay term loan 
borrowings, reducing debt by more than $100 million). We also believe that the 
sale of its unprofitable Maine energy facility, which it expects to close in 
December 2012, could help to support financial metrics. If this transaction 
closes, we expect some benefit to the company's profitability and cash flows 
in subsequent quarters.   

Still, uncertainty regarding asset sales and internal growth lead us to the 
conclusion that it's unlikely that the pace of deleveraging would be rapid 
enough to warrant higher ratings within the next year. While less likely, we 
could raise the ratings if there is improvement in operating results or if 
proceeds from additional asset sales enable the company to generate 
FFO-to-total adjusted debt exceeding 15%.

CreditWatch

The CreditWatch listings on the company's senior subordinated notes and $21.4 
in unsecured FAME revenue bonds will be resolved upon the successful 
completion of its proposed equity and debt offerings. If completed as 
proposed, we expect to raise the issue rating on the senior subordinated debt 
to 'B-' from 'CCC+' and revise the recovery rating to '5', from '6'. If the 
transactions are completed as proposed, we also expect to raise the issue 
level ratings on the $21.4 million of unsecured FAME bonds to 'BB-' from 'B-' 
and revise the recovery ratings to '1' from '5'. The higher ratings reflect 
our view that recovery prospects for the noteholders and the FAME bonds will 
improve following the completion of the proposed transactions. 

Related Criteria And Research
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept. 18, 2012
     -- Corporate Ratings Criteria 2008, April 15, 2008
 
Ratings List
Ratings Affirmed

Casella Waste Systems Inc.
 Corporate credit rating          B/Negative/--      

Casella Waste Systems Inc.
 Senior secured                   BB-                
  Recovery rating                 1

CreditWatch Positive
                                  To                 From
Casella Waste Systems Inc.
 $335 million subordinated        CCC+/Watch Pos     CCC+
  Recovery rating                 6                  6

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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