MOODY'S LOWERS RATINGS OF WASTE MANAGEMENT (SENIOR TO Ba1)
Moody's Investors Service lowered Waste Management's long-term debt rating to Ba1 from Baa3, its subordinated debt rating to Ba3 from Ba1, and its Prime-3 rating for the issuance of commercial paper to Not Prime. The outlook is negative pending the company's ability to successfully refocus its operations in the North American market, improve its operating systems and controls, and enhance fiscal responsibility in its acquisition program. The downgrades follow today's announcement that Waste Management is pursuing a program of asset sales, with disposition proceeds to be used for a combination of debt reduction, share repurchases and tuck in acquisitions to be executed in a manner designed to preserve its debt protection measures. Although funding will come from asset sale proceeds, any share repurchases would further weaken Waste Management's balance sheet, which is already burdened by high debt levels (despite the proposed debt reduction), past charge-offs, and significant intangible assets. In addition, Waste Management will be executing its plan at a time when its earnings and cash flow have weakened and while there is considerable change occurring in the management of the company.
Waste Management remains a market leader in the waste service industry with an extensive infrastructure of landfills, transfer stations, and collection operations primarily in North America. However, while the company has shown continued high levels of EBITDA, Moody's is particularly concerned with the significant amount of cash required to support the company's operations. A hefty growth in working capital, high levels of capital spending in excess of depreciation, payments for litigation and insurance, and pension payments resulting from the recent termination of old Waste Management's pension program, together with requirements posed by a continuing acquisition program (including the pending close of a $500 million acquisition of Allied Waste's Canadian operations) and related merger costs continue to absorb cash, reducing the potential for any meaningful debt reduction from operating cash flow. Consequently, while reduced with the proceeds from asset sales, debt levels will remain high for the foreseeable future.
The ratings lowered are:
Waste Management, Inc. - senior notes and mandatorily tendered senior notes to Ba1 from Baa3; subordinated debt to Ba3 from Ba1; shelf registration for the issuance of subordinated debt to (P)Ba3 from (P)Ba1; rating for the $3 billion, 364-day unsecured Bank Revolving Credit Facility to Ba1 from Baa3; rating for the $2 billion, 5-year unsecured Bank Revolving Credit Facility to Ba1 from Baa3; and rating for the issuance of commercial paper to Not Prime from Prime-3.
Waste Management Holdings, Inc. - senior notes, step-up notes, medium-term notes, debentures, and industrial revenue bonds to Ba1 from Baa3; convertible subordinated notes to Ba3 from Ba1. The debt obligations are supported by a guaranty from Waste Management, Inc.
County of Westchester Industrial Development Agency (Westchester Resco Company Project) - Resource Recovery Equity Bonds, which are guaranteed by Wheelabrator Technologies, to Ba1 from Baa3.
Waste Management continues to be adversely impacted by a series of recent negative announcements including a downward revision in its earnings, greater uncertainty regarding future operating performance, the restatement of its first quarter results, significant changes in management, and the initiation of shareholder suits. The company's financial flexibility has been reduced by the market's negative reaction to this publicity, which has resulted in a significant drop in market capitalization. While steps are being taken to address the company's operational problems, there remains uncertainty related to the adequacy of controls on decentralized operations, and the integration of information systems, particularly as it relates to the company's ability to manage collection of accounts receivable.
The negative outlook reflects the potential that a further downward rating action could be taken should management be unable to implement adequate controls to satisfactorily resolve the company's operating problems, improve cash flow from core operations and, in particular, reduce working capital. In addition, the company faces the challenge of successfully executing its strategic initiatives, particularly the sale and allocation of proceeds from planned asset dispositions.
Waste Management, Inc., headquartered in Houston, TX, is the global leader in providing waste management services.
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