Fitch Affirms and Withdraws Harsco Corporation's Ratings
(The following statement was released by the rating agency)Fitch Ratings-Chicago-04 February 2021:
Fitch Ratings has affirmed Harsco Corporation's Long-Term Issuer Default Rating (IDR) at 'BB', secured revolver and term loans at 'BB+'/'RR1', and senior unsecured notes at 'BB'/'RR4'. The Rating Outlook is Negative. Harsco had $1.3 billion of debt outstanding as of Sept. 30, 2020.
The ratings and Negative Outlook reflect Harsco's elevated financial leverage following recent acquisitions and exacerbated by the coronavirus downturn. Harsco completed the acquisition of Stericycle's Environmental Solutions business (ESOL) in April 2020, funding the acquisition primarily with debt.
The ratings consider currently weak operating results within the ESOL business and the challenges associated with integrating both ESOL and Clean Earth, which was acquired in June 2019. In the event that a recovery in demand, synergies from acquisitions, or an improvement in margins are delayed, Harsco's credit profile could remain weaker than incorporated in Fitch's current ratings for the company.
The ratings are withdrawn for commercial reasons.
Key Rating Drivers
Higher Financial Leverage: Assuming a full year of ESOL results in 2020, Harsco's debt/EBITDA is estimated to be around 5.0x at YE 2020, and Fitch estimates that leverage will improve to the high-3.0x range in 2021 as the economy recovers and ESOL's margins improve. Leverage is expected to improve to the low-3.0x range in 2022 through a combination of further EBITDA growth and debt reduction from FCF.
Near-term Operating Pressure: Fitch expects Harsco's sales will increase by around 24% in 2020 driven by the acquisitions of Clean Earth and ESOL offsetting a projected decline at Harsco Environmental. The company's EBITDA margins are expected to narrow to around 12.2% in 2020 from 18.0% in 2019 due to lower organic sales and the mix effect of the ESOL acquisition. Fitch expects Harsco's organic sales and margins will begin to recover in 2021 and that margins will recover to 15%-16% by 2022 as Harsco's management implements corrective measures at ESOL and achieves planned synergies.
FCF Constrained: FCF is estimated to be positive at around 1%-2% of revenues in 2020 as the effect of lower margins is offset by a reduction in capex and working capital, and to be within this range in 2021. FCF is expected to be used for debt reduction while acquisitions are on hold over the medium term as the company focuses on integrating ESOL and Clean Earth.
Portfolio Shift: Harsco's portfolio has undergone a significant shift over the past 18 months with the acquisitions of Clean Earth and ESOL and the sale of the company's three industrial businesses. These transactions give Harsco a meaningful presence in environmental solutions and, in particular, hazardous waste disposal, while reducing its exposure to the cyclical industrial sector. Hazardous waste disposal, which will represent around 40% of Harsco's revenues, is less cyclical than Harsco's other businesses and has solid long-term growth prospects.
Cyclical End-Markets: The recent portfolio shift notwithstanding, Harsco faces meaningful cyclicality in its other operations, which are tied to the level of steel production and investment in rail equipment, with particular exposure to steel and mineral markets. The company has experienced weaker results in its Harsco Environmental business due to lower services demand and weaker production levels at its steel mill customers and in its rail business due to a mix shift to lower-margin equipment.
Harsco is a diversified manufacturer and service provider that participates in a variety of end-markets, each of which has a different set of competitors. Another diversified industrial in the 'BB' category is Trinity Industries, a manufacturer and lessor of rail cars. When compared with Trinity's manufacturing operations, Harsco has lower financial leverage and generates higher EBITDA margins. Trinity has a substantial railcar leasing business that broadens its scale and helps to mitigate the cyclicality in its railcar manufacturing operations. No country ceiling, parent/subsidiary or operating environment aspects affect the ratings.
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
--Sales increase by around 24% in 2020 driven by the acquisitions of Clean Earth and ESOL offsetting a projected decline at Harsco Environmental. Sales grow 15% in 2021 and 10% in 2022.
--EBITDA margins narrow to 12.2% in 2020 from 18.0% in 2019 due primarily to lower sales and the mix effect of the ESOL acquisition. Margins recover to 15%-16% by 2022 due to synergies and operational improvements at ESOL.
FCF is estimated to be positive in 2020 and 2021 at around 1%-2% of revenues. FCF is assumed to be used for debt reduction over the medium term.
Not applicable as the ratings are being withdrawn.
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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Harsco's liquidity at Sept. 30, 2020 was supported by cash of $84 million and a $700 million secured revolver maturing in June 2024, on which an estimated $421 million was available.
Harsco's debt structure as of Sept. 30, 2020 consisted of $254 million drawn on the secured revolver, $280 million outstanding on a secured term loan maturing in June 2024, $218 million outstanding on a secured term loan maturing in December 2024, and $500 million of senior unsecured notes due 2027.
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.
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.
Following the withdrawal of ratings for Harsco Corporation, Fitch will no longer be providing the associated ESG Relevance Scores.
Harsco Corporation; Long Term Issuer Default Rating; Affirmed; BB; Rating Outlook Negative
; Long Term Issuer Default Rating; Withdrawn; WD
----senior unsecured; Long Term Rating; Affirmed; BB
----senior unsecured; Long Term Rating; Withdrawn; WD
----senior secured; Long Term Rating; Affirmed; BB+
----senior secured; Long Term Rating; Withdrawn; WD
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