GFL Environmental Inc. -- Moody's rates GFL's new senior secured notes Ba3
Rating Action: Moody's rates GFL's new senior secured notes Ba3
Global Credit Research - 17 Aug 2020
$600 million of new debt rated
Toronto, August 17, 2020 -- Moody's Investors Service ("Moody's") assigned a Ba3 rating to GFL Environmental Inc.'s ("GFL") proposed new $600 million senior secured notes due in 2025. The B1 corporate family rating, B1-PD probability of default rating, Ba3 ratings on GFL's existing senior secured bank credit facility and senior secured notes and B3 ratings to its senior unsecured notes remain unchanged. The Speculative Grade Liquidity Rating also remains unchanged at SGL-2. The outlook remains stable.
GFL announced on August 13, 2020 that it has entered into a definitive agreement to acquire WCA Waste Corporation. This transaction comes on the heels of the July announcement by GFL to acquire certain assets from the Waste Management and Advanced Disposal Services merger. Both acquisitions are expected to close in the second half of 2020 and are valued at a total of approximately $2.1 billion. GFL will fund the acquisitions with the net proceeds from the senior secured notes issuance, $600 million proceeds from the issuance of preferred equity, cash on hand (C$700) and amounts drawn on its revolving credit facility. The transactions are expected to increase GFL's pro forma leverage for FY2020E from 4.6x to 4.8x.
Assignments:
..Issuer: GFL Environmental Inc.
....Senior Secured Regular Bond/Debenture, Assigned Ba3 (LGD3)
RATINGS RATIONALE
GFL's B1 CFR is constrained by: 1) its history of aggressive debt-financed acquisition growth strategy; 2) Moody's expectation that leverage will remain above 4x in the next 12 to 18 months (about 4.8x pro forma for recent acquisitions and the proposed notes issuance); 3) the short time frame between acquisitions which increases the potential for integration risks and creates opacity of organic growth; and 4) GFL's majority ownership by private equity firms, which may continue to hinder deleveraging. However, GFL benefits from: 1) the company's diversified business model; 2) high recurring revenue supported by long term contracts; 3) its good market position in the stable Canadian and US non-hazardous waste industry; 4) EBITDA margins that compare favorably with those of its investment grade rated industry peers; and 5) good liquidity.
The stable outlook reflects Moody's view that GFL will sustain a leverage that will remain below 5x and maintain its stable margins and good liquidity in the next 12 to 18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The ratings could be upgraded if GFL demonstrates consistent and visible organic revenue growth, maintains good liquidity and sustains adjusted debt/EBITDA below 4.0x (4.8x pro forma FY2020E) and EBIT/Interest above 2.0x (1.6x pro forma FY2020E). The ratings could be downgraded if liquidity weakens, possibly caused by negative free cash flow, if there is a material and sustained decline in margins due to challenges integrating acquisitions or if adjusted Debt/EBITDA is sustained above 5.0x (4.8x pro forma FY2020E) and EBIT/Interest falls below 1.5x (1.6x pro forma FY2020E).
GFL has good liquidity (SGL-2). Sources are approximately C$900 million with no mandatory debt repayments over the next 12 months. After the closing of the acquisitions of WCA Waste Corporation and the Waste Management assets, GFL is projected to have limited cash on its balance sheet. GFL will have approximately C$550 million of availability under its C$628 million and $40 million revolving credit facilities, both due August 2023, and Moody's expected free cash flow of about C$350 million over the next 12 months to June 2021. GFL's revolver is subject to a net leverage covenant, which Moody's expects will have at least a 40% cushion over the next four quarters. GFL has limited flexibility to generate liquidity from asset sales as its assets are encumbered.
Environmental risks considered material are the various regulations and requirements that GFL is subjected to for the collection, treatment and disposal of waste. GFL has a long track record of adhering to the requirements for the proper handling of the waste materials encountered.
The governance considerations we make in GFL's credit profile include the majority ownership by private equity firms as well as its history of debt-financed acquisitions and aggressive financial policies, which may be reversed after the completion of the IPO earlier this year. We also considered GFL's track record of successfully integrating its acquisitions for the expansion of its business as well as the management team's experience in the amalgamation of the businesses.
The Ba3 ratings on the senior secured notes and term loan are one notch above the CFR due to the senior debt's first priority access to substantially all of the company's assets as well as loss absorption cushion provided by the senior unsecured notes. The B3 rating on the senior unsecured notes is two notches below the CFR due to the senior unsecured notes' junior position in the debt capital structure.
The principal methodology used in this rating was Environmental Services and Waste Management Companies published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113573. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
GFL Environmental Inc., headquartered in Toronto, provides solid waste and liquid waste collection, treatment and disposal solutions and soil remediation services to municipal, industrial and commercial customers in Canada and the US. Pro forma for acquisitions, annual revenue is approximately C$5.0 billion. GFL is publicly traded on the Toronto Stock Exchange and New York Stock Exchange.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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