-- 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%.
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.
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
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
-- Technical services (43% of sales for the first nine months of 2012),
which include collection, transport, treatment, and disposal of hazardous and
-- Field services (10%), which include specialty, on-site maintenance
services such as tank cleaning, decontamination, remediation, and spill
-- 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
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
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 -
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.
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.
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.
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 Affirmed; CreditWatch/Outlook Action
Clean Harbors Inc.
Corporate Credit Rating BB+/Stable/-- BB+/Watch Neg/--
Clean Harbors Inc.
US$550 mil 5.25% sr unsecd nts due BB+
Recovery Rating 3
Clean Harbors Inc.
Local Currency NR BB+ /Watch Neg
Recovery Rating NR 4
Ratings Affirmed; CreditWatch Action
Clean Harbors Inc.
Local Currency BB+ BB+ /Watch Neg
Recovery Rating 3 4