TEXT - S&P affirms Clean Harbors ratings

Tue Nov 27, 2012 2:36pm EST

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Overview
     -- Clean Harbors Inc. announced that it is issuing $550 million of
senior unsecured notes and will use the proceeds to fund a portion of the $1.25 
billion purchase price related to its proposed acquisition of Safety-Kleen 
Inc., the holding company of Safety-Kleen Systems Inc. (B+/Watch Pos/--).
     -- We are affirming our ratings, including our 'BB+' corporate credit 
rating, on Clean Harbors and removing the ratings from CreditWatch negative, 
where we placed them on Nov. 1, 2012. We are also revising our recovery rating 
on the existing senior unsecured notes, assigning ratings to the company's 
proposed senior unsecured notes, and withdrawing our ratings on the fully 
redeemed senior secured notes.
     -- The stable outlook reflects our view that the company will be able to 
maintain a financial risk profile that is appropriate for the current rating, 
including an adjusted funds from operations (FFO)-to-debt ratio of 25%-30%.
 
Rating Action
On Nov. 27, 2012, Standard & Poor's Ratings Services affirmed its ratings, 
including the 'BB+' corporate credit rating on Norwell, Mass.-based Clean 
Harbors Inc. and removed them from CreditWatch, where we placed them with 
negative implications on Nov. 1, 2012. At the same time, we assigned a stable 
outlook. In addition, we revised our recovery rating on the company's $800 
million senior unsecured notes due 2020 to '3' from '4', and assigned our 
'BB+' issue-rating and '3' recovery rating to the proposed $550 million senior 
unsecured notes due 2021. The '3' recovery rating indicates our expectation of 
meaningful (50%-70%) recovery in the event of a payment default. We also 
withdrew our ratings on the company's $520 million senior secured notes due 
2016 because the company refinanced these notes with proceeds from the 
issuance of $800 million in senior unsecured notes due 2020. Lastly, upon 
completion of the proposed acquisition, we will align the corporate credit 
rating on Safety-Kleen with our credit rating on Clean Harbors and remove it 
from CreditWatch positive. 

Rationale
The affirmation and stable outlook reflect our view that while Clean Harbors' 
financial risk profile will deteriorate slightly due to the additional debt 
and environmental liabilities incurred with the proposed acquisition of 
Safety-Kleen, it should remain sufficient to support the current ratings. 
Important factors supporting this conclusion are our reassessment of Clean 
Harbors' business risk profile to recognize the benefits of the Safety-Kleen 
acquisition and the mix of acquisition financing that involves sizable cash 
and equity components. Clean Harbors recently announced a follow-on public 
offering of 6.0 million common shares, which we believe may net the company 
over $300 million in proceeds. This, combined with the use of existing cash, 
results in only a modest increase in debt leverage to roughly 2.9x pro forma 
adjusted debt-to-EBITDA at Sept. 30, 2012, from 2.5x on a stand-alone basis. 
The rating affirmation also reflects our view that management will remain 
committed to maintaining prudent financial policies as it executes its growth 
strategy. While the $1.25 billion acquisition (7.3x Safety-Kleen's expected 
EBITDA in 2012) represents the largest acquisition that Clean Harbors has ever 
made, management has a track record of integrating its large acquisitions 
fairly smoothly. We believe the company will maintain an adjusted FFO-to-debt 
ratio in the 25%-30% range during the next two years. Our ratings assume that 
the company will complete the acquisition of Safety-Kleen according to the 
terms and conditions that have been indicated. The terms of the senior 
unsecured notes contain a special redemption feature whereby the note proceeds 
will be repaid to investors if the acquisition does not close by April 2013. 
For our modeling purposes, we assumed the acquisition will close before 
year-end 2012.

The ratings are supported by improvement in the company's business risk 
profile, as Clean Harbors' market position, customer reach, and service-line 
diversity will improve with the acquisition. With roughly $1.3 billion in 
revenue, Safety-Kleen is the nation's leading collector and re-recycler of 
used oil and the largest provider and servicer of parts cleaning equipment. 
The company also recycles the used solvent used in parts washing . We believe 
roughly $15 million-$20 million of synergies are achievable in the first year, 
as Clean Harbors intends to internalize the portion of waste that Safety-Kleen 
currently disposes of at competing disposal facilities, as well as by 
cross-selling services to new customers.

Following the acquisition, the ratings on Clean Harbors will reflect the 
company's "significant" financial risk profile (including environmental 
liabilities), an acquisition-oriented growth strategy, and some susceptibility 
of its operations to economic cycles. The company's leading competitive 
position in the hazardous waste management industry, good diversity, 
specialized assets, and "strong" liquidity with a favorable debt maturity 
schedule partially offset these factors. Standard & Poor's characterizes Clean 
Harbors' business risk profile as "satisfactory." 

With roughly $2.2 billion in revenues, 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:
     -- Technical services (43% of sales for the first nine months of 2012), 
which include collection, transport, treatment, and disposal of hazardous and 
industrial wastes;
     -- Field services (10%), which include specialty, on-site maintenance 
services such as tank cleaning, decontamination, remediation, and spill 
cleanup;
     -- Industrial services (27%), such as high-pressure and chemical 
cleaning, catalyst handling, decoking, material processing, and lodging 
services to energy and industrial companies; and
     -- Oil and gas field services (20%), including fluid handling, downhole 
servicing, and directional boring services to oil and gas exploration, 
production, and power generation customers.

Clean Harbors' improved competitive market position contributes to our 
assessment of its business risk as intermediate. The company handles more than 
two-thirds of the commercial hazardous incineration volume and roughly 20% of 
hazardous landfill volume in North America. The company's core business is 
performing well, partly because of increased exposure to the oil and gas end 
market from a series of acquisitions it has made since 2009. End-market 
diversity is good, and revenues in many of its sectors have increased. 
Landfill volumes and incinerator utilization remain strong. In the third 
quarter of 2012, landfill volumes increased 78% year over year on large-scale 
projects in the Bakken shale deposit, and incineration utilization was strong 
at 91%. Still, the company's operations are subject to economic cycles, as 
recessions give rise to lower waste volumes and overcapacity in some segments. 
Yet the company maintained solid operating performance through the last 
recession despite weaker demand from its chemical, manufacturing, and 
utilities customers, along with a nationwide reduction in landfill volumes and 
volatile fuel and labor costs during this period.

Our performance expectations for 2013 include:
     -- Sales growth of 69% as a result of the contributions from the 
acquisitions the company made in 2012, increased waste volumes, and modest 
improvements in pricing;
     -- EBITDA margins of 17% because of lower profitability from 
Safety-Kleen, offset by continued profitability from Clean Harbors' oil and 
gas, refinery, and chemicals markets; good operating leverage; and the 
realization of synergies; and
     -- Free cash flow of over $100 million partly because of improved working 
capital management.

The company's trailing-12-month EBITDA margins as of Sept. 30, 2012, were 19%. 
We believe that Clean Harbors' margins will decline slightly following the 
Safety-Kleen acquisition because Safety-Kleen is a lower margin business. 
However, the company should still be able to maintain relatively good 
profitability with margins in the 17%-18% range if it contains costs in spite 
of a weak but gradually improving economy and pricing competition. Clean 
Harbors' profitability has consistently increased over the past decade, from 
13% in 2002 (the year the company acquired Safety-Kleen's chemical services 
division). 

We characterize Clean Harbors' financial risk profile as significant, which 
reflects our view that acquisitions will remain a key part of the company's 
growth strategy. Still, Clean Harbors has operated with significant excess 
cash balances since 2008 and has demonstrated a willingness to use equity and 
cash on hand to reduce its reliance on debt to finance large acquisitions. We 
believe the company will continue to strike a prudent balance between its 
growth objectives and financial policy decisions, as management has publicly 
stated that it intends to keep reported debt leverage within a range of 2.5x - 
3.0x.

Environmental liabilities remain significant but manageable. At Sept. 30, 
2012, Clean Harbors had $167 million of closure, postclosure, and remediation 
obligations. Pro forma for the acquisition, we expect the amount of these 
liabilities to increase to roughly $200 million. Annual estimates for the 
costs of managing these environmental liabilities are roughly $15 million. We 
adjust its debt figure to include the capitalization of operating lease 
commitments, tax-adjusted asset retirement and environmental obligations, 
accrued interest, and tax-adjusted self-insurance liabilities. We believe the 
company will be able to maintain FFO-to-debt of 25%-30%--a range we consider 
appropriate for the ratings. 

Liquidity
We expect liquidity to remain strong (as defined in our criteria) given the 
company's good internally generated cash flow and healthy availability under 
its revolving credit facility. As of Sept. 30, 2012, Clean Harbors had about 
$535 million of cash and marketable securities and $163 million of 
availability under a $250 million asset-based revolving credit facility due 
May 31, 2016. Pro forma for the financing transaction, we expect Clean 
Harbors' cash balance to decrease to just over $100 million with availability 
of over $270 million under a proposed $400 million asset-based revolving 
facility due 2017. There are no significant debt maturities until the 
revolving facility matures. We expect Clean Harbors to generate some 
discretionary cash flow in 2013 and 2014, with free cash flow in the $100 
million-$150 million range.

Key uses of cash are likely to include:
     -- Capital spending of roughly $270 million in 2013 and 2014; and
     -- Acquisition spending in following the integration of Safety-Kleen, 
could exceed $100 million in 2014.

The company was in compliance with its fixed-charge ratio financial covenant 
as of Sept. 30, 2012, and we expect the company to retain adequate headroom 
under the covenant during the near-to-intermediate term.

Recovery analysis
We rate both the company's $800 million senior unsecured notes due 2020 and 
its proposed $550 million senior unsecured notes due 2021 'BB+' with recovery 
ratings of '3'. For the detailed recovery analysis, see our recovery report on 
Clean Harbors, to be published following this report on RatingsDirect.

Outlook
The stable outlook reflects our view that Clean Harbors' competitive strengths 
will support consistent operating results despite the prospects for slow 
economic growth and the company's exposure to cyclical end-markets. We expect 
the company to successfully manage the challenges of integrating the 
Safety-Kleen acquisition. We also believe the company will achieve operating 
synergies and improve working capital management to generate adequate free 
cash flow. While we don't expect significant debt reduction, we do expect 
management to adhere to prudent financial policies such that reported debt 
leverage is near its publicly stated 2.5x-3.0x target. In the year immediately 
following the Safety-Kleen acquisition, we expect additional debt-financed 
acquisitions to be very limited.

We could consider a one-notch upgrade to low-investment-grade within the next 
two years if Clean Harbors integrates Safety-Kleen smoothly and delivers 
greater synergies and operational efficiencies than we anticipate, so that 
adjusted FFO-to-debt continually exceeds 30% and adjusted free cash 
flow-to-debt is near 15%. 

While less likely, we could lower the ratings if integration or other 
challenges result in deteriorating operating performance or increased debt 
without indication of near-term improvement. This could happen if revenues 
remain flat and EBITDA margins decline to less than 14% or lower, which would 
likely cause the ratio of FFO-to-total debt to approach 20%.

Related Criteria And Research
     -- Clean Harbors Inc. Ratings On Watch Negative And Safety-Kleen Systems 
Inc. On Watch Positive On Acquisition Agreement, Nov. 5, 2012
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept. 18, 2012

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Clean Harbors Inc.
 Corporate Credit Rating                BB+/Stable/--      BB+/Watch Neg/--

New Rating

Clean Harbors Inc.
 Senior Unsecured
  US$550 mil 5.25% sr unsecd nts due    BB+                
  12/31/2021                            
   Recovery Rating                      3                  

Ratings Withdrawn
                                        To                 From
Clean Harbors Inc.
 Senior Secured
  Local Currency                        NR                 BB+ /Watch Neg
  Recovery Rating                       NR                 4

Ratings Affirmed; CreditWatch Action
                                        To                 From
Clean Harbors Inc.
 Senior Unsecured
  Local Currency                        BB+                BB+ /Watch Neg
  Recovery Rating                       3                  4
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