TEXT-S&P puts Clean Harbors ratings on watch negative
Overview -- Clean Harbors Inc. recently announced that it has entered into an agreement to acquire Safety-Kleen Systems Inc. for $1.25 billion in cash. -- The transaction is subject to certain closing conditions, including receipt of regulatory approvals, and the company expects the closing to occur in the fourth quarter of 2012. -- We are placing our ratings on Clean Harbors on CreditWatch with negative implications and are placing our ratings on Safety-Kleen on CreditWatch with positive implications. Rating Action As Standard & Poor's Ratings Services previously announced on Nov. 1, 2012, it placed its 'BB+' corporate credit rating and all other ratings on Norwell, Mass.-based Clean Harbors Inc. on CreditWatch with negative implications. At the same time, we placed our ratings, including our 'B+' corporate credit rating, on Plano, Texas-based Safety-Kleen Systems Inc. on CreditWatch with positive implications. Rationale The CreditWatch placement reflects the likelihood that Clean Harbors Inc.'s financial risk profile could weaken beyond expectations at the current rating, given our expectation that the company will primarily fund the Safety-Kleen acquisition with debt. While management has publicly stated that it will use more than $400 million of existing cash on hand to fund a portion of the transaction and that it intends to keep its reported debt-to-EBITDA in the 2.5x area (under 3.0x at maximum), the company's pro forma funds from operations (FFO)-to-debt ratio will likely fall below the 30% mark we deem appropriate for the rating. The CreditWatch placement also reflects our view that Safety-Kleen's credit quality may improve as it becomes part of Clean Harbors. The company will become part of a company with a larger scope of operations and greater geographic and service diversity. With roughly $2.2 billion in trailing-12-month revenues at June 30, 2012, Clean Harbors is one of the largest providers of environmental services and the largest operator of nonnuclear hazardous waste treatment facilities in North America. The company's operations include the collection, transport, treatment, and disposal of hazardous and industrial wastes; on-site maintenance services, such as tank cleaning, decontamination, remediation, and spill cleanup; high-pressure and chemical cleaning, catalyst handling, decoking, material processing, and lodging services to energy and industrial companies; and fluid handling, downhole servicing, directional boring services to oil and gas exploration, production, and power generation customers. A key to resolving the CreditWatch will be assessing the implications of the acquisition on Clean Harbors' competitive position, growth strategy, and the company's track record of balancing its growth objectives in accordance with prudent financial policies. The company expects the acquisition to close in the fourth quarter of 2012 and the acquisition is subject to customary regulatory approvals and closing conditions. CreditWatch We placed the ratings on Clean Harbors on CreditWatch with negative implications and placed the ratings on Safety-Kleen on CreditWatch with positive implications. We will monitor developments relating to this transaction and will resolve the CreditWatch listings once further details related to the transaction become available. We intend to meet with management to discuss a variety of topics related to the transaction, such as integration risks, the pro forma capital structure, and management's strategic objectives and financial policies. The CreditWatch placements indicate the heightened risk that we will lower Clean Harbors' ratings and raise Safety-Kleen's ratings following our review of the transaction and implications for credit quality. Related Criteria And Research -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Corporate Ratings Criteria 2008, April 15, 2008 Ratings List CreditWatch Action Clean Harbors Inc. To From Corporate credit rating BB+/Watch Neg/-- BB+/Stable/-- Senior secured BB+/Watch Neg BB+ Recovery rating 4 4 Senior unsecured BB+/Watch Neg BB+ Recovery rating 4 4 Safety-Kleen Systems Inc. To From Corporate credit rating B+/Watch Pos/-- B+/Stable Senior secured BB-/Watch Pos BB- Recovery rating 2 2 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.