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Rating Action:

MOODY'S INVESTORS SERVICE UPGRADES THE SENIOR UNSECURED DEBT OF WASTE MANAGEMENT, INC. TO Baa3 FROM BA1. ASSIGNS STABLE OUTLOOK

03 Apr 2003
MOODY'S INVESTORS SERVICE UPGRADES THE SENIOR UNSECURED DEBT OF WASTE MANAGEMENT, INC. TO Baa3 FROM BA1. ASSIGNS STABLE OUTLOOK

Approximately 7.8 billion in debt affected

New York, April 03, 2003 -- Moody's Investors Service upgraded the long-term debt and liquidity ratings of Waste Management, Inc. ("Waste Management") and assigned a stable outlook. This action concludes the review for a possible upgrade initiated on February 11, 2003.

The upgrade reflects the strength of Waste Management's cash generation despite the weak economic environment; improvement in the company's liquidity profile in light of a relaxation of the leverage covenant under its bank agreement; and prudent treasury policy as evidenced by the management of its large share repurchase program.

The waste services industry continues to be impacted by a sluggish economy and higher fuel and insurance costs which contributed to WM's slightly eroded profitability margins in 4Q02 and increased leverage. However, the combination of the company's cash generative ability, its fiscal policy, liquidity profile and anticipated cost management suggests that any further weakness related to macroeconomic influences would be insufficient to cause a negative movement in the rating. Thus the rating is assigned a stable outlook.

The upgrade of the speculative grade liquidity rating to SGL -- 1 from SGL -- 2 reflects the positive impact of the easing of the leverage test in the first quarter of 2003 which improves access to the credit facility in advance of up to $1.01 billion in potential debt maturities in 2003. Moody's anticipates that the company's operational cash flow, combined with existing cash balances, and approximately $875 million of availability under two multi-year committed unsecured revolving credit facilities should be sufficient to finance the company's capital needs over the next 12 months including a $460 million litigation settlement payment, a potential early redemption in August 2003 at the option of the holders of the $450 million issue of 7.1% senior notes due 2026, the December 2003 maturity of the $434 million issue of 6.385% notes and $60 million of other notes due throughout the first three quarters. The company's liquidity cushion, together with its proven regular access to capital markets, mitigates the refinancing risk in the near term. In addition, the unencumbered assets provide a good source of alternate liquidity, although sales of large blocks of waste assets would be a lesser possibility due to the limited pool of potential buyers. As the company's debt is now rated investment grade, the SGL rating is withdrawn.

The affected ratings include:

Waste Management, Inc. -

The $1.75 billion guaranteed senior unsecured revolving credit maturing in 2006 raised to Baa3 from Ba1;

The $150 million issue of 7.125% senior unsecured bonds due 2017 raised to Baa3 from Ba1;

The $250 million issue of 7.375% guaranteed senior unsecured global bonds due 2029 raised to Baa3 from Ba1;

The $300 million issue of 7% senior unsecured notes due 2004 raised to Baa3 from Ba1;

The $300 million issue of 7.125% senior unsecured notes due 2007 raised to Baa3 from Ba1;

The $400 million issue of 6.5% senior unsecured notes due 2008 raised to Baa3 from Ba1;

The $500 million issue of 6.875% senior unsecured global notes due 2009 raised to Baa3 from Ba1;

The $600 million issue of 7.375% senior unsecured notes due 2010 raised to Baa3 from Ba1;

The $400 million issue of 6.375% guaranteed senior notes due 2012 raised to Baa3 from Ba1;

The $600 million issue of 7% senior unsecured bonds due 2028 raised to Baa3 from Ba1;

The $500 million issue of 7.75% senior unsecured global bonds due 2032 raised to Baa3 from Ba1.

The Ba2 senior unsecured issuer rating is raised to Baa3 from Ba2.

The Ba1 senior implied rating is upgraded to Baa3 and withdrawn.

The SGL -- 2 Speculative Grade Liquidity Rating is raised to SGL -- 1 and is withdrawn.

Waste Management Holdings, Inc. -

The $100 million issue of 7% senior unsecured notes due 2005 raised to Baa3 from Ba1;

The $150 million issue of 7.65% senior unsecured debentures due 2011 raised to Baa3 from Ba1;

The $150 million issue of 8% senior unsecured step-up notes due 2004 raised to Baa3 from Ba1;

The $250 million issue of 8.75% senior unsecured debentures due 2018 raised to Baa3 from Ba1;

The $3 million issue of 6.65% senior unsecured notes due 2005 raised to Baa3 from Ba1;

The $300 million issue of 7% senior unsecured notes due 2006 raised to Baa3 from Ba1;

The $450 million issue of 7.1% senior unsecured notes bonds due 2026 raised to Baa3 from Ba1;

The $500 million issue of 6.375% senior unsecured notes due 12/1/2003 raised to Baa3 from Ba1;

The $31 million issue of 2% convertible subordinated notes due 2005 raised to Ba1 from Ba2;

The $91.8 million of CA, NY and MI Industrial Revenue Bonds raised to Baa3 from Ba1.

As a leading domestic solid waste company with an extensive infrastructure of collection operations, transfer stations and landfills, Waste Management has managed fairly well during its first prolonged economic downturn. Despite a difficult second half of 2002, revenues decreased only 0.3%, primarily as a result of decreased volumes associated with the slowdown in industrial and commercial activity. Volume decreases in higher margin segments, together with increased insurance, labor and fuel costs, negatively impacted the profitability margins of all large industry players. Waste Management's existing cost containment programs and fuel surcharge helped offset the cost increases which contributed to a 160 bps decline in the fiscal 2002 gross profit margin to 39.5%. The lower SG&A expense due to staff reductions resulted in a smaller EBITDA margin decrease. As such, the EBITDA margin in 2002 decreased 140 bps, to 25.4%, as compared to 2001.

Despite some weakness in profitability margins, cash flows remain very strong. In fiscal 2002, Waste Management generated over $2.1 billion of Cash Flow from Operations, which was primarily used to finance approximately $1.3 billion of capital expenditures and $982 million of share repurchases. Moody's believes that going forward cash flows will remain strong and may improve further as the company continues to implement its cost savings programs and to improve working capital management. Moody's also expects an improvement in cash generation once the economy improves as the proportion of the company's revenue coming from higher margin industrial and commercial waste improves along with the economy.

Leverage, as measured by debt to free cash flow (cash from operations less capex less dividends), increased to 9.6 times in fiscal 2002 from 8.1 times the previous year. However, a lower average cost of borrowing contributed to some improvement in interest protection measurements. Interest coverage, measured as EBITDA to interest expense, increased to 6.1 times in fiscal 2002 from 5.6 times a year ago, while the fixed charge coverage increased to 2.2 times in 2002 from 1.6 times in 2001.

There is no notching of the rated senior debt instruments, which are all unsecured. Moody's notes that debt at Waste Management, Inc. and Waste Management Holdings, Inc. is 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. The Ba1 rating on the convertible subordinated notes reflects the contractual subordination of the notes to the senior debt of the company.

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

New York
Tom Marshella
Managing Director
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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