Fitch Affirms Republic Services' at 'BBB'; Outlook Stable
(The following statement was released by the rating agency)Fitch Ratings-Chicago-16 March 2021:
Fitch Ratings has affirmed Republic Services, Inc's (RSG) and Browning Ferris Industries, LLC's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. Fitch has also assigned RSG's $1.0 billion 364-day revolving credit facility a rating of 'BBB'. The Rating Outlook is Stable. RSG had $8.8 billion of debt as of Dec. 31, 2020.
Republic Services, Inc.; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable
----senior unsecured; Long Term Rating; Affirmed; BBB
----senior unsecured; Long Term Rating; New Rating; BBB
Browning Ferris Industries, LLC; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Stable
----senior unsecured; Long Term Rating; Affirmed; BBB
Key Rating Drivers
Strong Pandemic Performance: RSG's 2020 performance was stronger than expected, highlighted by an increase of over 100bps in EBITDA margins via cost flexibility and solid pricing fundamentals. Volume performance was also better than expected, with a full year decline of 3%. Concerns about long-term business closures were mitigated by the improvement in volume levels. Competitive dynamics also appeared stable through the pandemic as evidenced by consistent pricing and customer churn rates through the year.
Steady Leverage Expected: Fitch expects debt/EBITDA of around 3.0x in 2021 and that it will remain at that level going forward. This level is similar to other 'BBB' category corporate issuers, yet remains higher than its main municipal solid waste (MSW) peers. RSG's debt/EBITDA has historically, including through the recessionary periods, ranged in the high 2x to low 3x, after considering acquisitions. This range is consistent with RSG's long-term targets, and while periods of high acquisition activity may drive a spike in leverage, Fitch expects the company would deleverage quickly to this range.
Entrenched Market Position: Fitch considers the competitive barriers of a vertically integrated MSW business, such as RSG, to be high, supported by an established network of landfills, transfer stations and collection operations. The network is protected by high costs to replicate in addition to regulatory and political barriers to establishing competing landfill operations. Competition is largely regional in nature with the highest intensity generally focused in collection operations, particularly against small independent and municipal operators. Nearly two-thirds of RSG's operations are positioned outside of large urban markets where competition is typically higher. It also has a good proportion of franchise markets where it has sole-provider status under long-term contracts.
Stable Industry Fundamentals: The MSW industry continues to exhibit a good degree of competitive rationality, particularly among the industry's large public firms which account for a high proportion of the market. RSG and its large peers have demonstrated a prioritization for maintaining profitable contracts and rational pricing, including recouping cost inflation through contract terms based on inflation indexing or other pricing mechanisms. RSG and its peers have taken similar approaches in addressing shortfalls in the recycling business model, following the collapse in key recycled commodity prices. Core MSW pricing growth has been solid in the industry and RSG has consistently realized 3-5% core price growth and 1%-3% yield growth over the last 10 years.
Sustainable Profitability: Fitch expects FCF margins (after dividends) of around 6%-7% in 2021 and to remain steady thereafter. Good underlying solid waste performance including efforts to mitigate weak recycled commodity prices and improve pricing dynamics in relation to cost inflation are supportive of stable to slightly improving EBITDA margins in the near term. RSG, similar to its main peers, has a strong EBITDA margin in the high-20% range although capital intensity is also high and is typically around 10%-11%, primarily to support landfill assets.
Solid Financial Flexibility: RSG's good financial flexibility is supported by its commitment to its financial policy, particularly as it relates to capital structure, and consistent FCF generation. In a downturn scenario, Fitch believes RSG has a good degree of flexibility to maintain its capital structure, primarily from the ability to pare share repurchases. However, Fitch believes maintaining its dividend payments would remain a priority given the company's reputation as a stable cash flow generator.
Good Business Stability: RSG benefits from consistent demand fundamentals in municipal solid waste production and good customer diversification within the U.S. These fundamental strengths are moderated by RSG's exposure to recycled commodity prices and other commodity-linked revenues and construction activity. Fitch considers the solid waste industry to be fairly mature, allowing positive but slow industry growth. RSG enjoys a high degree of multi-year contracts and exclusive market revenue, which supports low customer churn and pricing stability.
RSG's ratings consider the company's top two market position in the North American MSW industry, consistent profitability and capital structure, and healthy financial flexibility. Fitch also accounts for the large-vertically integrated scale of its operations at $10 billion of revenue, greater than Waste Connections which is approaching $6 billion (WCN; BBB+), and less than Waste Management (WM; BBB+) at over $16 billion. Combined, Fitch estimates the three peers account for over one-third of the industry.
RSG and WM have similar levels of profitability with EBITDA margins in the mid-to-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.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Organic revenue growth of 4-5% in 2021, followed by price-led low-to-mid single digit organic growth thereafter;
- EBITDA margins remain generally flat in the near-term, RSG is able to maintain higher margins achieved in 2020;
- RSG remains active in pursuing acquisitions, however; debt/EBITDA remains managed to 3.0x
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 2.8x, FFO leverage below 3.5x and/or FCF (after dividends)/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 3.3x, 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 '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
As of Dec. 31, 2020, the company had $38 million of cash and $2.7 billion of availability under its $3.3 billion revolving lines of credit after borrowings and letters of credit. Debt maturities are manageable with the 364-day revolver maturing first in August 2021. Fitch expects debt maturities to be refinanced prior to coming due.
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.
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