Rating Action: Moody's assigns B1 CFR and B1 senior secured to Granite Acquisition, outlook stableGlobal Credit Research - 09 Mar 2021$1.4 billion of rated debt instrumentsNew York, March 09, 2021 -- Moody's Investors Service ("Moody's") assigned first-time ratings to Granite Acquisition, Inc. ((New), d/b/a Waste Innovations "WIN"), including a B1 Corporate Family Rating ("CFR"), B1-PD Probability of Default Rating and B1 rating on the company's proposed senior secured (first lien) bank credit facility, consisting of a revolving credit facility and term loan. The outlook is stable.The rating assignment follows the January 2021 strategic merger of Wheelabrator Technologies, Inc. ("WTI") with Tunnel Hill Partners, LP ("THP", Caa1 stable), a waste-by-rail company, and which will operate primarily as a waste-environmental services company. WIN will issue a $1 billion 7-year term loan to fund a sponsor dividend of $629 million and repay $306 million of the existing (net) debt of THP. WIN will also have a $400 million 5-year revolving credit facility, which is expected to be undrawn at transaction close. The existing ratings of THP are unaffected at this time, and will be withdrawn once repaid. As well, the existing debt ratings of WTI (rated under Granite Acquisition Inc.) will be withdrawn upon transaction close.RATINGS RATIONALEWIN's ratings reflect its modest scale, with a primary regional focus in the US Northeast, and capital-intensive business model that generates a more moderate cash flow profile relative to rated industry peers. Debt-to-EBITDA (all ratios including Moody's standard adjustments), approaching 4.6x pro forma, will likely remain elevated into 2022 amid higher SG&A and rising labor cost pressures, although Moody's expects the ratio to moderate towards 4x by year end 2022. WIN is still exposed to earnings and cash flow volatility from commodity prices in its energy business, which represents about 20% of company EBITDA, although that risk is partially mitigated by hedging.These factors are tempered by WIN's relatively stable waste disposal operations, underpinned by long term contracts (averaging 7.6 years) and critical infrastructure assets with high barriers to entry that support a recurring revenue base. With disposal capabilities supported by strategically-located facilities and rail-connected transfer stations, the company is well-positioned to capture growing demand in the northeast region where landfill capacity is tightening. This should continue to drive positive pricing and support better margins and cash flow generation over the intermediate term.WIN's liquidity profile is adequate based on a large revolving credit facility of $400 million for a company with revenue expected to approach the $1 billion range. Moody's expects free cash flow to be constrained by high capital expenditures over the next year, and nominal cash balances, but expects free cash flow to improve in 2022, with at least low to mid-single digit range free cash flow to debt. The revolving facility will be subject to a springing first-lien net leverage covenant (ratio to be determined), tested if borrowings exceed 35% of the revolver commitment and subject to certain carve-outs related to letters of credit. The term loan is not expected to have any financial maintenance covenants.The stable outlook reflects Moody's expectations for steady waste streams to support modest revenue growth and margin expansion, aided by a positive disposal pricing revenue environment amid limited landfill capacity over time in the primary US northeast region. Moody's also expects the company to maintain adequate liquidity and continue to mitigate the risks associated with commodity pricing and weak power markets in the U.S.From an environmental perspective, WIN should benefit from regulatory requirements driving demand for its waste disposal services. The essential nature of services and increasing awareness of environmental concerns in the industry should support the company's operating model and credit metrics longer term. The company complies with environmental laws and regulations and obtains necessary government permits to operate its collection facilities and landfills, with no material issues disclosed.Governance risk is highlighted by potential for aggressive financial policies given WIN's private equity ownership and acquisitive nature, which creates uncertainty and execution risks.The senior credit facility is expected to contain flexible covenants for transactions that if undertaken could adversely affect creditors, including incremental facility capacity up to the sum of (a) the greater of closing date EBITDA and an EBITDA equivalent percentage (100% of pro forma Consolidated EBITDA divided by an amount yet to be determined; plus (b) amounts replacing any permanent voluntary prepayments on the term loan or reduction in revolver commitments, plus (c) unlimited amounts so long as (x) the Consolidated First Lien Net Leverage Ratio does not exceed a level 0.5x higher than the closing date ratio (for pari passu debt); (y) Consolidated Senior Secured Net Leverage Ratio does not exceed a level 1.25x higher than the closing date ratio (for junior secured debt); or (z) either the Consolidated Total Net Leverage Ratio does not exceed a level 2.0x higher than the closing date ratio, or the Consolidated Interest Coverage Ratio is no less than 2.0x (for unsecured debt).The credit agreement is expected to require a 100% asset sale sweep (with step-downs to 50% and 0% at 0.5x and 1.0x inside closing date first lien net leverage ratio, respectively) of non-ordinary course asset sale proceeds, subject to reinvestment rights. Only wholly-owned subsidiaries are required to provide subsidiary guarantees, posing risks of potential guarantee release following a partial change in ownership; there is no explicit protective language limiting such releases.Moody's took the following actions:New Assignments:..Issuer: Granite Acquisition, Inc. (New).... Corporate Family Rating, Assigned B1.... Probability of Default Rating, Assigned B1-PD....Senior Secured 1st Lien Term Loan, Assigned B1 (LGD3)....Senior Secured 1st Lien Revolving Credit Facility, Assigned B1 (LGD3)Outlook Actions:..Issuer: Granite Acquisition, Inc. (New)....Outlook, Assigned StableFACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be downgraded with Moody's expectation of a decline in revenues (including flat organic top line growth) and margins, and/or sustained negative free cash flow and debt-to-EBITDA approaching 5x. A meaningfully weaker liquidity position would also lead to a downgrade.The ratings could be upgraded with profitable expansion of the company's operating footprint beyond its primary focus on US northeast markets for greater scale and expectations of debt-to-EBITDA sustainably below 4x, EBIT to interest above 2x and free cash flow to debt to be sustained above the mid-single digits. The maintenance of a good liquidity profile would also be a prerequisite for an upgrade.The principal methodology used in these ratings 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.Granite Acquisition, Inc. is an indirect wholly-owned subsidiary of Wheelabrator Technologies, Inc. Wheelabrator merged with Tunnel Hill Partners LP (in January 2021), one of the largest integrated waste-by-rail companies in the US which owns and operates a network of collection and transfer assets in the Northeast US. Wheelabrator and Tunnel Hill Partners LP are owned by affiliates of Macquarie, a private equity firm, which will remain the owner of the merged company, Waste Innovations. On a pro forma basis, revenues approximated $960 million for the fiscal year ended December 31, 2020.REGULATORY DISCLOSURESFor 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are 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_1243406.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Yvonne Njogu Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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