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Rating Action:

MOODY'S ASSIGNS B2 RATING TO PROPOSED $215MM SENIOR SECURED CREDIT FACILITY OF ENVIROSOLUTIONS REAL PROPERTY HOLDINGS; OUTLOOK STABLE

14 Jun 2005
MOODY'S ASSIGNS B2 RATING TO PROPOSED $215MM SENIOR SECURED CREDIT FACILITY OF ENVIROSOLUTIONS REAL PROPERTY HOLDINGS; OUTLOOK STABLE

Approximately $215 Million of Rated Debt Securities Affected

New York, June 14, 2005 -- Moody's Investors Service assigned a B2 rating to the proposed $215 million senior secured credit facility of EnviroSolutions Real Property Holdings, Inc. and its co-borrowers, each of which is a wholly owned subsidiary of EnviroSolutions Holdings, Inc. (EnviroSolutions). Moody's also assigned a senior implied rating of B2 and a stable outlook.

The ratings reflect the short operating history of the company and its growth through a series of acquisitions; the small size of the company relative to larger rated industry competitors; revenue concentration from a limited number of properties and geographic regions; significant leverage and; material projected capital expenditure needs related to the development of recently acquired landfills and the implementation of its rail strategy.

The ratings also reflect leading positions in key local markets that have attractive demographics and limited landfill capacity; good projected liquidity upon the closing of the proposed credit facility and; expected improvements in cash flows from internalization of waste to landfills under development.

Moody's assigned the following ratings:

$40 million senior secured revolving credit facility due 2011, rated B2;

$175 million senior secured term loan B facility due 2012, rated B2;

Senior implied rating, rated B2;

The ratings outlook is stable.

The ratings are subject to the review of the final executed documents.

Proceeds from the $175 million term loan B and $35 million of 12.5% senior subordinated notes are expected to be used to repay existing senior secured indebtedness, pay fees and expenses and provide about $98 million of cash to fund the company's growth strategy. The revolver is expected to be undrawn at closing.

The company was formed in 2003 and since then has completed a series of acquisitions in the waste management industry. These acquired operations could present integration challenges and will have a short operating history under current management. For the year ended December 31, 2004, pro forma for acquisitions completed through May 2005, almost all of the company's revenues and cash flow are derived from operations in Northern Virginia, Baltimore, Maryland and the New York/New Jersey Metro area. The company's assets in these geographic regions include one construction and demolition (C&D) landfill (Lorton) and two transfer stations and regional hauling and collection operations. The Lorton landfill in Virginia, which generated about half of pro forma EBITDA, is exposed to the cyclical nature of residential and commercial construction in the region.

EnviroSolutions is a relatively small player compared to its larger rated industry competitors with pro forma revenues for the year ended December 31, 2004 of about $150 million. Pro forma debt to revenues at December 31, 2004 would have been about 1.4 times. However, the company benefits from a leading market position for many of its key assets. The company's Potomac Disposal Services is the second largest hauling operation in Northern Virginia; Lorton is the largest C&D landfill in Virginia; and Solid Waste Transfer (SWTR) is the largest transfer station in New Jersey. These geographic regions are attractive due to strong growth, dense population, a lack of new disposal options and high tipping fees.

EnviroSolutions recently acquired a landfill in Kentucky (Big Run) and is constructing a greenfield landfill in West Virginia (Copper Ridge). The Big Run landfill is open for business and accepting a limited amount of waste. The company has filed a notice of intent to expand the landfill and is awaiting a state technical review. The Copper Ridge landfill is not yet open for business and the company is awaiting final approval for its expansion plan. The company expects to spend about $35 million in capital expenditures over the next six months and $22 million in 2006, with a large portion related to its expansion plans at Big Run and Copper Ridge. Payments of deferred purchase price, primarily related to Big Run and Copper Ridge, are expected to be about $23 million in the next six months and $46 million in 2006. Upon completion of the expansion and receipt of final approval, the company intends to internalize waste collected at SWTR in New Jersey to Big Run and Copper Ridge using rail transportation. Company management expects the expansion and internalization strategy at Big Run and Copper Ridge to generate significant improvements in cash flows beginning in 2006. The ratings give limited benefit to this expansion strategy due to uncertainty regarding the timing of the expansion approval process, the economics of the rail strategy and the achievability of projected volume forecasts at Copper Ridge and Big Run.

The stable ratings outlook anticipates the use of cash on hand and cash flow from operations to fund expansion capital expenditures and deferred purchase price payments related to acquisitions. Such expenditures are expected to aggregate over $120 million during the next eighteen months. The revolving credit facility is not expected to be needed to fund these expenditures. Moody's expects modest revenue and cash flow growth from the company's established waste management operations and a gradual cash flow benefit as the company implements its internalization strategy at Big Run and Copper Ridge in 2006.

The ratings could be upgraded if the company achieves volume and profitability forecasts related to Big Run and Copper Ridge in 2006, such that debt to EBITDA levels decline to below 4 times and sustainable free cash flow from operations to total debt exceeds 8%.

The ratings could be downgraded if pricing and volume trends deteriorate in the company's major markets, capital expenditure requirements significantly exceed expectations or the company's expansion plans at Copper Ridge and Big Run are not approved.

The proposed senior secured credit facility is guaranteed by EnviroSolutions and all its direct and indirect subsidiaries other than the co-borrowers. The B2 rating assigned to the proposed senior credit facility reflects the first priority security interest in substantially all of the real estate owned by the co-borrowers and guarantors, all permits related to any landfills currently owned by the co-borrowers and any other landfill acquired by the co-borrowers in the future, and substantially all the receivables of the co-borrowers and guarantors.

Debt to EBITDA for the twelve month period ended March 31, 2005, on a pro forma basis for acquisitions consummated through May 31, 2005 and the proposed credit facility, was about 6 times and is expected to decline to about 5 times by December 31, 2006. Free cash flow for fiscal 2005 is expected to be negative because of significant capital expenditure requirements and is expected to be about breakeven in 2006.

EnviroSolutions Holdings, Inc. is an integrated solid waste management company with leading local market positions in the Northeastern and Mid-Atlantic United States. Revenue for the year ended December 31, 2004 was about $66 million.

New York
Patrick Finnegan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Lenny J. Ajzenman
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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