-- Houston-based Waste Management Inc. is issuing $500 million in
senior unsecured notes in order to refinance existing debt.
-- We assigned our 'BBB' rating to the new issue.
-- We also affirmed our existing ratings on Waste Management, including
the 'BBB' corporate credit rating.
-- The stable outlook indicates our expectation that the company will
maintain credit quality despite weak pricing and volume trends.
On Sept. 5, 2012, Standard & Poor's Ratings Services assigned its 'BBB' rating
to Waste Management Inc.'s proposed $500 million of senior unsecured notes due
2022. In addition, we affirmed our ratings on Waste Management, including the
'BBB' corporate credit rating. The outlook is stable.
The ratings on Houston-based Waste Management Inc. reflect the company's
"strong" business risk profile, highlighted by its competitive market position
as the largest solid waste management company in the U.S. and Canada, along
with its "significant" financial risk profile. Standard & Poor's Ratings
Services expects that the company will maintain good liquidity and will
continue to adhere to moderate financial policies and balanced capital
allocation from its sizable free cash flow.
Waste Management provides integrated services to residential, municipal,
commercial, and industrial customers. The company has a nearly 25% share of
the roughly $54 billion domestic nonhazardous solid waste market. Although the
U.S. solid waste industry is mature and competitive, its overall risk
characteristics are favorable. The essential nature of the services provided,
relatively strong and reliable cash flows, and above-average profit margins,
as well as considerable resilience to economic swings in the residential and
light commercial segments, all support the credit quality of industry
Waste Management's strong EBITDA margin, which was 25% as of June 30, 2012,
reflects favorable industry dynamics and the company's pricing discipline,
although its ability to maintain price hikes has slightly diminished in the
past couple of years. During the 2008-2009 recession, Waste Management was
able to raise prices to partially offset the volume declines related to the
loss of low-margin customers and the slowdown in residential construction.
Price gains in the company's core collection and disposal business averaged
roughly 2.5% in 2009, but these gains have since declined to roughly 1.8% and
1.6% in 2010 and 2011, respectively. Pricing increased less than 1% in each of
the first two quarters of 2012, as competition in residential, municipal, and
commercial contract activity limited pricing in the first half of the year.
Adjustments related to the consumer price index (CPI) take effect in the
second half, which may help pricing somewhat.
Waste Management's financial risk profile is "significant". Debt totaled $11.5
billion as of June 30, 2012. The company's debt balance is not likely to
change significantly following the completion of the proposed notes issuance.
We expect the company to use proceeds to refinance $400 million of 6.375%
senior notes due November 2012, as well as to refinance tax-exempt revenue
bonds outstanding. We adjust total debt upward by $1.7 billion to account for
the capitalization of operating leases, asset-retirement liabilities at
landfills (final capping, closure, and postclosure for a 30-year period),
environmental remediation obligations, and self-insurance liabilities on a
Waste Management intends to continue its acquisition activity. The company
bought waste logistics services company Oakleaf Global Holdings Inc. in July
2011 for $425 million and made additional investments in Canadian recycling
assets in the first quarter of 2012. Waste Management's funds from operations
(FFO)-to-total debt was 23% as of June 30, 2012. We anticipate this ratio,
which has averaged 25% since 2006, will remain in the 20% to 30% range--an
appropriate level for the ratings given the company's strong business risk
profile. It's maintained debt to capital at its targeted level of roughly 60%
for the past few years, and we do not expect further material debt reduction.
In 2010, the company resumed its share-repurchase program, which resulted in
$501 million of cash outlays in 2010 and $575 million in 2011. Although the
company has not made any share repurchases through the first six months of
2012, we expect some share repurchases in the back half of the year, though
they would not likely exceed the authorized $500 million.
Our short-term rating on Waste Management is 'A-2', and we classify its
liquidity as "adequate". We base our liquidity assessment on the following
factors and assumptions:
-- The company has good relationships with its banks, in our assessment,
and has a good standing in the credit markets.
-- We expect liquidity sources (including cash, FFO, and credit facility
availability) over the next 12 to 18 months to exceed uses by more than 1.3x.
-- Even if EBITDA declines by 30%, we believe net sources would be
sufficient to cover cash needs, and that compliance with the credit facility's
total debt-to-EBITDA financial covenant could also survive a 20% drop.
Waste Management benefits from its sizable internally generated funds,
substantial availability under the revolving credit facility, and excess cash.
As of June 30, 2012, it had $237 million in cash and equivalents and roughly
$700 million available under its $2.0 billion revolving credit facility
maturing in May 2016. LOCs are the primary use of the revolving facility.
We expect the company's 2012 capital-allocation program to allocate most, if
not all, of its free cash flow to cash dividends, acquisitions and
investments, and common stock repurchases. We believe acquisitions will likely
exceed divestitures as the company searches for value-priced assets. We expect
capital expenditures to increase to roughly $1.5 billion due to added
growth-related spending. The company's working capital needs are minimal.
Debt maturities should be manageable, at $455 million per year on average from
2013-2016. We expect that the company will be able to refinance significant
debt maturities based on its current credit risk profile and its demonstrated
access to the capital markets.
Key financial covenants within its credit agreement include a maximum total
debt-to-EBITDA ratio of 3.50x and a minimum EBIT to interest coverage ratio of
2.75x. As of June 30, 2012, the company had an EBITDA cushion of 13% and an
EBIT cushion of 28% against the respective covenants.
The outlook is stable. Despite our expectations for limited price gains and
flat volumes in 2012, Waste Management's competence in providing essential
services, along with its leading market position and geographic and customer
diversity, should enable the company to maintain FFO-to-total debt of 20% to
30%--a level we consider appropriate for the rating.
We could lower the ratings if acquisitions or share repurchases result in the
deterioration of the financial risk profile, so that FFO to debt is
consistently less than 20%--this could happen if revenues remain flat in 2012
from the current trailing-12-month level while margins decline by one
percentage point to 24% and remain there without any debt reduction.
Given the company's indicated preference of using cash flow to finance
shareholder rewards and acquisitions instead of to reduce debt, we believe
that Waste Management's financial risk profile is likely to remain
significant. Therefore, an upgrade is unlikely at this time.
Related Criteria And Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
Waste Management Inc.
Corporate credit rating BBB/Stable/A-2
Waste Management Inc./Waste Management Holdings Inc.
Senior unsecured BBB
Waste Management Inc.
$500 million senior unsecured
due 2022 BBB