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Rating Action:

MOODY'S ASSIGNS Ba1 TO WASTE MANAGEMENT'S 6.385% SR. NOTES DUE 2012; CONFIRMS EXISTING RATINGS AND STABLE OUTLOOK

22 Nov 2002
MOODY'S ASSIGNS Ba1 TO WASTE MANAGEMENT'S 6.385% SR. NOTES DUE 2012; CONFIRMS EXISTING RATINGS AND STABLE OUTLOOK

Approximately $7.8 billion in debt affected

New York, November 22, 2002 -- Moody's Investors Service assigned a rating of Ba1 to Waste Management, Inc.'s $400 million issue of 6.385% guaranteed senior notes due 2012. The ratings outlook is stable. At the same time the rating agency confirmed the company's long term debt ratings, its speculative grade liquidity rating and its stable rating outlook. The confirmed ratings include:

Waste Management, Inc. -

Ba1 senior implied rating;

Ba2 senior unsecured issuer rating;

SGL -- 2 Speculative Grade Liquidity Rating

Ba1 rated $1.75 billion guaranteed senior unsecured revolving credit maturing in 2006;

Ba1 rated $150 million issue of 7.125% senior unsecured bonds due 2017;

Ba1 rated $250 million issue of 7.375% guaranteed senior unsecured global bonds due 2029;

Ba1 rated $300 million issue of 7% senior unsecured notes due 2004;

Ba1 rated $300 million issue of 7.125% senior unsecured notes due 2007;

Ba1 rated $350 million issue of 6.5% senior unsecured notes due 12/15/2002;

Ba1 rated $500 million issue of 6.875% senior unsecured global notes due 2009;

Ba1 rated $600 million issue of 7% senior unsecured bonds due 2028;

Ba1 rated $600 million issue of 7.375% senior unsecured notes due 2010.

Waste Management Holdings, Inc. -

Ba1 rated $100 million issue of 7% senior unsecured notes due 2005;

Ba1 rated $150 million issue of 7.65% senior unsecured debentures due 2011;

Ba1 rated $150 million issue of 8% senior unsecured step-up notes due 2004;

Ba1 rated $250 million issue of 8.75% senior unsecured debentures due 2018;

Ba1 rated $300 million issue of 6.6% senior unsecured notes due 2005;

Ba1 rated $300 million issue of 7% senior unsecured notes due 2006;

Ba1 rated $450 million issue of 7.1% senior unsecured notes bonds due 2026;

Ba1 rated $500 million issue of 6.375% senior unsecured notes due 2003;

Ba2 rated $31 million issue of 2% convertible subordinated notes due 2005;

$70 million of Industrial Revenue Bonds rated Ba1.

The proceeds of the $400 million senior note offering will be used to repay the $350 million issue of 6.5% senior notes due December 15, 2002, at which time that rating will be withdrawn. The new notes will be issued under an indenture dated September 10, 1997, as a new series of debt securities and will rank equally to all senior unsecured indebtedness of the company.

The ratings continue to reflect Waste Management's leading market position in the domestic solid waste industry with an extensive infrastructure of collection operations, transfer stations, and landfills and strong cash generation. The ratings also reflect the company's modest tangible equity of $254 million due to its significant $5.2 billion of goodwill, comprising 26% of total assets; and a modest LTM 9/30/02 EBITA return on assets of 8.9%. Moody's notes that improvements in leverage and cash generation are somewhat offset by the Board's authorization to purchase up to $1 billion annually in common shares.

The rating outlook is stable. Moody's notes that the company has sizable cash payments of up to $1 billion due in 2003 as well as its planned $1 billion share repurchase program. Moody's also notes that the Waste Management's cushion on its bank covenants has diminished. An unlikely loss of access to the capital markets due to events external to the company without a curtailment of the share repurchase program could place negative pressure on the long term ratings.

There is no notching of the rated debt instruments, which are all unsecured. Moody's notes that debt at WM and Holdings appear to be neutrally guaranteed. The company's operations are conducted through non-guarantor operating subsidiaries, which constitute substantially all of the operating assets of the consolidated entity. These subsidiaries have over $4 billion in environmental, tax and other liabilities that could present structural subordination issues for bank and public debt.

In 3Q02 Waste Management's revenues remained virtually flat as compared to 3Q01. The revenue growth was impacted by a 0.6% decline in volume, related to the slowdown of industrial and commercial activity, which was offset by a 0.5% price increase in selected markets. The volume decreases, concentrated primarily in the company's higher margin segments -- the commercial and industrial collection and landfill disposal -- and increased insurance, maintenance and labor costs, resulted in a slight deterioration of profitability margins. Although these cost increases were partially offset by the company's cost procurement programs, year over year gross profit margin decreased 190 bps, to 39.7%, and EBITDA margin decreased 160 bps, to 26.7% in 3Q02. Operating profit margin decreased to 16% in 3Q02 from 16.2% in 3Q01 despite elimination of goodwill amortization, effective January 1, 2002, and absent a $19 million of insurance settlement, which took place last year.

The return on assets, measured by LTM EBITA to average total assets, decreased 90 bps, to 8.9% at 9/30/02 as compared to the same period last year, primarily as a result of slightly decreased profitability.

Despite a lower average cost of borrowing this year, Waste Management's interest protection measures remained flat, to slightly weakened. Interest coverage, as measured by EBITA to interest, decreased to 3.9 times in 3Q02 from 4.1 times in 3Q01.

Leverage, measured as total debt to trailing twelve-months ending 9/30/02 EBITDA increased to 2.9 times from 2.6 times for a comparable period a year ago. Measured as total debt to free cash flow (defined as cash flow from operations after capex), leverage is significant for the rating category, albeit decreasing as a result of improving operating cash flow. For the trailing twelve months ending 9/30/02, total debt to free cash flow decreased to 8.8 times from over 11.0 times for a comparable period a year ago. At that period, the company reported cash of $656 million

The company is expected to have large cash payments in 2003. The $350 million shareholder lawsuit settlement is payable in 1Q3, the $500 million issue of 6.375% senior unsecured notes mature 4Q03, and there is a potential put to the company in 3Q03 at the option of the noteholders of its $450 million issue of 7.1% senior unsecured notes bonds due 2026. The company expects to finance most of its obligations via the capital markets and to fund any working capital, capital expenditures and the up to $1 billion in share repurchases from internally generated cash. Mitigating factors to the refinancing risk is the company's strong cash generation, history of access to the capital markets, its $900 million of availability under its $2.4 billion revolving credit agreements and cash at 9/30/02 of $676 million.

Waste Management, Inc., headquartered in Houston, TX, is a leader in providing environmental waste management services.

New York
Catherine Guinee
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Mark Gray
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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