Overview -- Casella Waste Systems Inc. (Casella) redeemed its $180 million second-lien notes due 2014. -- We are affirming our 'B' corporate credit rating. -- At the same time, we are raising the ratings on the company's unsecured industrial revenue bonds and subordinated notes to 'BB-' and 'B-', respectively, and removing them from CreditWatch positive. We are also withdrawing our ratings on the second-lien notes. -- The negative outlook reflects the potential for a downgrade if the financial profile deteriorates further due to the continuation of challenging business conditions and Casella's highly leveraged capital structure. Rating Action On Nov. 12, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate credit rating on Rutland, Vt.-based Casella Waste Systems Inc. At the same time, we raised our issue rating on the company's $125 million senior subordinated debt to 'B-' from 'CCC+' and revised the recovery rating to '5', from '6'. We also raised our ratings on the company's $21.4 million in unsecured industrial revenue bonds issued by the Finance Authority of Maine (FAME) in 2005 to 'BB-' from 'B-' and revised the recovery rating to '1' from '5'. We simultaneously removed these issue ratings from CreditWatch, where we originally placed them with positive implications on Sept. 25, 2012. Lastly, we withdrew our ratings on the redeemed second-lien notes. Rationale The affirmation reflects our view that Casella will continue to generate an adjusted funds from operations (FFO)-to-debt ratio that is consistent with the 10%-15% range we expect for the current ratings. The CreditWatch resolution and upgrades of the debt issues reflect the completed redemption of $180 million in senior secured second-lien notes due 2014. Casella redeemed its second-lien notes by using $121 million of net proceeds from an add-on issuance of senior subordinated notes due 2019, $43 million of net proceeds from an Oct. 3, 2012, issuance of common stock, and revolving facility borrowings. We expect that these actions will result in improved recovery prospects for holders of the unsecured notes and the FAME bonds. 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 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 the most segment revenue (52%) 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 -- Flat to slightly negative free cash flow. Liquidity We classify Casella's liquidity as "adequate". Following the transactions and amendment to its credit facility, we expect about $85 million of availability under an 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. The company has nearly completed its large growth capital expenditures for landfill development, so we believe Casella will use most of its capital spending for maintenance and should average about 10.5% of revenues--roughly in line with the industry average. After the completion of the transaction, Casella's debt maturities are manageable with the earliest maturity in 2016 when its revolving credit facility becomes due. We expect Casella to maintain more than 10% in EBITDA cushion against financial covenants related to total leverage and interest coverage. 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 Casella is the obligor to $25 million in revenue bonds issued by the Finance Authority of Maine (FAME) in 2005. We rate the company's $3.6 million FAME revenue bond 'A/A-1', as this portion of the bonds is enhanced by a letter of credit. We rate the company's $21.4 million FAME revenue bond 'BB-', with a recovery rating of '1'. This portion of the FAME bonds is unsecured and does not benefit from a letter of credit enhancement. The '1' recovery rating reflects our expectation of very high (90%-100%) recovery in the event of a payment default. We rate the company's $325 million in senior subordinated notes due 2019 'B-', with a recovery rating of '5'. The '5' recovery rating reflects our expectation of a modest (10%-30%) recovery in the event of a payment default. Our recovery report on Casella will be published soon on RatingsDirect. Outlook The outlook is negative. We could lower the ratings in the next 12 months 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 its use of proceeds from a recent equity offering to help redeem the second-lien notes and its use of asset divestiture proceeds in 2011 to repay term loan borrowings. We also believe that the sale of its unprofitable Maine Energy Recovery Company incineration facility, which it expects to close by December 2012, could help to support financial metrics. If this transaction closes, we expect the company's profitability and cash flows to improve somewhat in subsequent quarters. Still, challenging economic conditions, uncertainty regarding asset sales, and internal growth shape our opinion 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%. 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/-- Upgraded; CreditWatch/Outlook Action To From Casella Waste Systems Inc. Subordinated Local Currency B- CCC+ /Watch Pos Recovery Rating 5 6 Finance Authority of Maine (FAME) $21.4 mil unsecured IRB BB- B-/Watch Pos Recovery rating 1 5 Rating Withdrawn To From Casella Waste Systems Inc. Senior secured Local Currency NR BB- Recovery Rating NR 1 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.