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Rating Action:

MOODY'S INVESTORS SERVICE ASSIGNS Ba1 TO WASTE MANAGEMENT INC.'S $500 MILLION ISSUE OF GUARANTEED SENIOR UNSECURED NOTES DUE 2032. REVISES OUTLOOK TO STABLE FROM NEGATIVE

20 May 2002
MOODY'S INVESTORS SERVICE ASSIGNS Ba1 TO WASTE MANAGEMENT INC.'S $500 MILLION ISSUE OF GUARANTEED SENIOR UNSECURED NOTES DUE 2032. REVISES OUTLOOK TO STABLE FROM NEGATIVE

Approximately US$ 9 Billion of Debt Affected.

New York, May 20, 2002 -- Moody's Investors Service assigned a rating of Ba1 to Waste Management, Inc.'s proposed $500 million issue of guaranteed senior notes due 2023. The ratings outlook is revised to stable from negative. At the same time the rating agency affirmed the company's long term debt ratings. The affirmed ratings include:

Waste Management, Inc. -

Ba1 senior implied rating;

Ba2 senior unsecured issuer rating;

Ba1 rated $750 million guaranteed senior unsecured 364-day revolving credit due 6/28/02;

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;

$2 billion of multiple seniority unsecured universal shelf rated (P)Ba1/(P)Ba2.

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 $285.7 million issue of 7.7% senior unsecured step-up notes due 10/10/2002;

Ba1 rated $300 million issue of 6.625% senior unsecured notes due 7/15/2002;

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;

$118.5 million of CA and MI Industrial Revenue Bonds rated Ba1.

The proceeds of the proposed $500 million senior note offering will be used to repay the $300 million issue of 6.625% senior notes maturing July 15, 2002. Excess amounts will be held in cash until the maturity of the $285 million issue of 7.7% notes due October 2002. The 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 assignment of a stable ratings outlook reflects the seasonal revenue increases and improving trends in the industrial and construction and demolition sectors that, due to the economic environment, had recently produced lower than expected earnings. In addition, the implementation of software related to client profitability and fleet management led to opportunistic price increases and improved operating leverage respectively. Any significant asset impairments related to the implementation of FAS 142; a trend of decapitalization; extended underinvestment in capital expenditures or a reversal of recent economy-driven earnings improvements could place negative pressure on the rating. On the other hand, improvements in leverage, EBIT return on assets and retained cash flow to debt (after any dividends or share repurchases) could have a positive impact on the ratings.

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. The ratings also reflect the company's modest tangible equity of $122 million due to its significant $5 billion of goodwill, comprising 27% of total assets; and a modest LTM 3/31/02 EBIT return on assets of 8.7%. Moody's notes that the recent improvements in leverage and cash generation are offset by the authorization to purchase up to $1 billion annually in common shares.

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 close to $4 billion in environmental, tax and other liabilities that could present structural subordination issues for bank and public debt.

In 1Q02 Waste Management's revenues decreased 4%, to $2.61 billion as compared to 1Q01. The internal growth rate declined 3.6% primarily as a result of lower volume (approximately 3.3%), that primarily related to the economic slowdown in the US. This resulted in a slight deterioration of profitability margins in 1Q02 as compared to 1Q01 because of revenue mix. The volume decreases were concentrated in the company's higher margin segments, the commercial and industrial collection and landfill disposal. Nevertheless, as a result of cost cutting initiatives, improved customer information systems and the restructuring of field based operations, the company was able to improve its gross profit margin in 1Q02 by 50 bps, to 40%. This margin improvement was somewhat offset by management hires as well as a smaller revenue base, driving the company's SG&A margin to 14.8% in 1Q02 from 14.3% in 1Q01.

Effective January 1, 2001, Waste Management stopped amortizing its intangible assets, which positively impacted the company's EBIT and net income. However, Waste Management's EBITA margin and EBITDA margins decreased due to higher SG&A as well as a lower margin revenue mix. The EBITA margin decreased to 12.8% in 1Q02 from 14.6% in 1Q01 and the company's EBITDA decreased to 23.8% in 1Q02 from 25.2% in 1Q01. The return on assets, measured by LTM EBITA to average total assets, improved by 10 bps, to 9.5% at 3/31/02 as compared to the same period last year.

As a result of a $1.1 billion year-over-year decline in debt balances and a lower cost of borrowing, the company's debt protection measures improved. As such, interest coverage, as measured by EBITA to interest, improved to 2.9 times in 1Q02 form 2.6 times in 1Q01. Likewise, EBITDA to interest improved to 5.3 times in 1Q02 from 4.4 times in 1Q01.

Leverage, measured as total debt to trailing twelve-month ending 3/31/02 EBITDA improved to 2.6 times from 2.8 times for a comparable period a year ago. Measured as total debt to free cash flow (defined as cash flow from operations after capex and dividends), leverage is still high, albeit decreasing. As such, total debt to free cash flow decreased to 7.7 times for trailing twelve months ending 3/31/02 from over 14.1 times for a comparable period a year ago.

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

New York
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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