Fitch Ratings has affirmed Republic Services,
The Rating Outlook is Stable. Fitch has also affirmed the company's senior unsecured credit facilities and notes at 'BBB'.
RSG has entered an agreement to fully acquire
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IDR
BBB
Affirmed
BBB
senior unsecured
LT
BBB
Affirmed
BBB
LT IDR
BBB
Affirmed
BBB
senior unsecured
LT
BBB
Affirmed
BBB
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VIEW ADDITIONAL RATING DETAILS
Key Rating Drivers
Transaction Neutral to Financial Profile: Fitch expects RSG's debt/EBITDA to be consistent with its long-term historical trend of 3.0x by FYE 2023, a modest uptick from about 2.7x forecasted for FY 2021. Fitch assumes the transaction will be fully debt funded, though terms are not yet disclosed, and does not assume meaningful debt repayment post-close. Fitch also believes capital deployment priorities will remain in place including balancing its leverage profile with pursuing M&A as well as share repurchases. The deal values ECOL at 14.1x LTM EBITDA or 11.2x after synergies of
RSG's EBITDA margins will be pressured by the combination, and Fitch assumes EBITDA margins decline to 29% by FY 2023 from 30% in 2021, primarily reflecting the impact of the ECOL. The concern is partly moderated by the relatively lower capital intensity at ECOL. Fitch expects FCF margins (after dividends) to remain around 7% through the forecast, consistent with FY 2020.
Mixed Business Profile Impacts: Fitch weighs the benefits of an improved market position and added growth opportunities within the environmental services business against its relatively more cyclical nature. While Fitch expects RSG to continue to add scale in the segment, Fitch does not currently assume further platform deals, significantly shifting business mix. Fitch also believes RSG will continue to be active within the traditional solid waste market.
The purchase of ECOL will add a leadership position within the environmental services market, including a series of hazardous waste landfills. It also builds the platform for accelerating growth through consolidation within the fragmented market and potential for cross-selling opportunities. These benefits are weighed against the higher cyclicality inherent to ECOL and RSG's existing environmental services businesses where there is a high exposure to industrial and energy markets as well as project driven revenue. Fitch believes the differences in service offerings with RSG's municipal solid waste business limits anti-trust concerns associated with the deal.
Rating Considerations: RSG has demonstrated a resiliency in its cash flow profile through business cycles and as the industry consolidates. The ratings reflect its steady leverage profile, top three market position and steady profitability. These strengths are supported by its entrenched market position, rational pricing behaviors within the industry and network of operations. The ratings also consider the company's exposure to recycled commodity prices as well as industrial and energy-linked business.
Derivation Summary
RSG's ratings consider the company's top two market position in the North American municipal solid waste industry, consistent profitability and capital structure, and healthy financial flexibility. Fitch also accounts for the large-vertically integrated scale of its operations at over
RSG and WM have similar levels of profitability with EBITDA margins in the high 20s and FCF margins around the mid-single-digits. These metrics are notably lower than WCN's industry leading profitability of EBITDA and FCF margin of over 30% and 10%, respectively. RSG has remained consistent with its financial policy and Fitch believes debt/EBITDA will remain around 3.0x. This level is somewhat higher than WM and WCN, which are expected to remain around the mid-to-high 2.0x.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
The acquisition of
The acquisition is fully debt funded;
Organic revenue growth in the high-single digits in 2021, followed by price-led low-to-mid single digit organic growth thereafter;
EBITDA margins improve to about 30% in 2021 from 29% in 2020 with pricing outpacing inflation through nine months 2021. Fitch assumes margins decline back towards 29% through 2023, reflecting the pro forma combination before considering synergies;
RSG prioritizes managing its leverage profile in line with its stated target but remains active in pursuing acquisitions and shareholder returns.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A change to a more conservative financial policy, leads to sustaining debt/EBITDA below 3.0x, FFO leverage below 3.5x and/or FCF (after dividend)/debt approaching the low double digits;
FCF margin sustained above 4%.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A less conservative financial policy, weak operating performance or an aggressive acquisition posture, leads to sustaining debt/EBITDA maintained above 3.5x, FFO leverage above 4.0x and/or FCF (after dividends)/debt sustained below the mid-single-digits;
FCF margin sustained in the low-single digits;
Industry competition drives a sustained decline in pricing rationality.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
As of
The debt structure for the
Issuer Profile
Summary of Financial Adjustments
Fitch has made no material adjustments that are not disclosed within the company's public filings.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
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