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Rating Action:

Moody's affirms Covanta CFR at Ba2; assigns Ba3 to converts

18 May 2009

Approximately $2.3 Billion of Debt Securities and Bank Facilities Affected

New York, May 18, 2009 -- Moody's Investors Service has affirmed Covanta Holding Corporation's (Covanta) Corporate Family Rating (CFR) and Probability of Default Rating at Ba2 and its speculative grade liquidity rating at SGL-1, and has assigned a Ba3 rating to the company's planned issuance of $300 million of senior unsecured convertible debentures due 2014. Moody's also upgraded Covanta's existing convertible debentures to Ba3 from B1, the company's bank facilities issued at Covanta Energy Corporation (CEC) to Ba1 from Ba2, and the Hempstead Industrial Development Agency, NY 5% IRBs (Hempstead IRBs) due 2010 (guaranteed by Covanta ARC LLC) to Baa2 from Baa3. The rating outlook for Covanta is stable.

Covanta's rating affirmation reflects the highly predictable earnings and cash flow expected from a diversified portfolio of primarily contracted energy-from-waste projects principally located throughout the US. The rating considers the strong operating performance of the portfolio and the relative high barriers to entry for most competing technologies. These strengths are balanced by the highly leveraged capital structure in place as well as the degree of structural subordination that exists at Covanta and at CEC. More than $1.0 billion of secured project level debt is senior to debt at Covanta and CEC, and in most cases, project level documentation requires satisfaction of a restricted payments test before dividends can be paid to Covanta or CEC.

The rating recognizes that a substantial portion of Covanta's project level debt will continue to amortize over the next five years, thereby benefiting creditors at Covanta and CEC. As exemplified by the convertible offering, the rating factors in our expectation that existing project debt amortization will likely be replaced by additional corporate or project level debt to finance new development projects and/or acquisitions. The Ba2 rating factors in the potential impact to the company's earnings and cash flow from the current global economic recession to include the demand for waste requiring disposal, the related impact on pricing for such services, as well as the decline in commodity prices which impacts both energy and scrap metal pricing. Moody's observes that Covanta's recent credit metrics strongly position the company in the Ba rating category as we calculate Covanta's cash flow (CFO pre-WC) to debt to be in the mid-high teens, cash flow coverage of interest expense to be in excess of 4.0x and free cash flow to debt to be in excess of 10% for the past two years. Factoring in the incremental convertible debt offering and the scheduled debt amortization during 2009, Moody's expects near-term credit metrics to slightly weaken from these recent historical levels as total debt is expected to be 5-7% higher at year-end 2009.

The upgrade of Covanta's convertible debt to Ba3 from B1 and the assignment of a Ba3 rating to the new convertible offering incorporates the expected increase in Covanta's enterprise value following the convertible offering and acknowledges the higher component of unsecured debt in Covanta's capital structure, suggesting that recovery prospects will be more closely aligned with the company's Ba2 CFR.

The upgrade of CEC's secured bank facilities to Ba1 from Ba2 reflects the improved recovery prospects for this structurally superior class of debt given the larger component of unsecured debt in the capital structure, as well as the direct benefit to CEC's lenders from the continued amortization of project level secured debt. Approximately $575 million of project level debt representing 55% of Covanta's total project level debt will amortize through the end of 2012.

The upgrade of the Hempstead IRBs to Baa2 from Baa3 reflects the improved collateral position of this security given the repayment of senior debt at Hempstead. The upgrade further recognizes the new tip fee contract extension with the Town of Hempstead for an additional 25 years commencing in August 2009.

Covanta's SGL-1 rating reflects our expectation that the company will maintain a very good liquidity profile over the next 4 quarter period as a result of its generation of strong internal cash flows, maintenance of cash balances and access to committed credit availability. The SGL-1 rating considers the predictable cash flow generation expected for the next four quarters based upon the highly contracted portfolio that exists and Covanta's historically strong plant operating performance. Moody's believes that excess cash flow after the payment of required debt amortization ($169 million) could reach $170 million during 2009. Such cash flow is likely to be used to invest in development projects or to fund acquisitions. Aside from the $169 million in required debt maturities that exist across the company's projects, the only other required amortization payment is a $6.5 million payment due on the CEC secured term loan.

Covanta's cash flow is expected to continue benefitting from the utilization of net operating loss carryforwards (NOLs). At December 31, 2008, Covanta had approximately $591 million of NOLs. Unrestricted cash on hand at Covanta at 03/31/2009 was around $159 million. Moody's observes that the projects' ongoing liquidity, debt service and maintenance requirements continue to be met by the funding of reserve accounts at the project level ($329 million at 03/31/2009). In addition to the $159 million of unrestricted cash, the company had availability of around $315 million under two credit facilities that expire in 2013 and 2014.

As of March 31, 2009, the company was in compliance with all of the financial covenants under its credit facilities. Moody's believes that with the incurrence of the incremental convertible debt and the fact that the leverage test in the company's credit facilities becomes more restrictive at December 31, 2009, the degree of head room under the company's financial covenants will tighten from historical levels. Moody's, however, believes that Covanta can manage this issue given the predictable nature of the company's cash flow.

Net proceeds from the offering, which will strengthen liquidity, will be used to fund general corporate purposes, the company's key development projects, including its 1,700 metric tons/day energy-from-waste project in Dublin, Ireland, and to fund potential acquisitions.

The stable outlook on Covanta's rating reflects Moody's expectation that: (i) the energy-from-waste projects' contracts with the respective municipalities and utilities will remain in place through their current maturities; (ii) Covanta's management will continue to operate the plants at high availability levels and maintain stability with regard to administrative, operating, and maintenance expenses; (iii) Covanta will be able to utilize all of its NOLs and (iv) Covanta will continue to finance its development projects and acquisitions in a manner that is neutral to credit quality.

For more information on Covanta, see the Credit Opinion on www.moodys.com.

The last rating action on Covanta occurred on January 22, 2007 when the CFR was upgraded to Ba2, a Ba2 rating was assigned to CEC's secured bank facilities, and a B1 rating was assigned to Covanta's unsecured convertible debentures.

Covanta 's ratings were assigned by evaluating factors believed to be relevant to its credit profile, such as i) the business risk and competitive position of Covanta versus others within its industry or sector, ii) the capital structure and financial risk of Covanta, iii) the projected performance of Covanta over the near to intermediate term, and iv) Covanta 's history of achieving consistent operating performance and meeting financial plan goals. These attributes were compared against other issuers both within and outside of Covanta 's core peer group and Covanta 's ratings are believed to be comparable to ratings assigned to other issuers of similar credit risk.

The ratings for Covanta's individual securities were determined using Moody's Loss Given Default (LGD) methodology.

Ratings Affected Include:

Rating Assigned

..Issuer: Covanta Holding Corporation

Senior Unsecured Conv./Exch. Bond/Debenture, Assigned Ba3 (84 - LGD5)

Ratings Upgraded

..Issuer: Covanta Holding Corporation

Senior Unsecured Conv./Exch. Bond/Debenture, Upgraded to Ba3 (84 - LGD5) from B1 (89 - LGD5)

..Issuer: Covanta Energy Corporation

Senior Secured Term Loan, Revolving Credit, and Letter of Credit Facility, Upgraded to Ba1 (33 -LGD3) from Ba2 (46 - LGD3)

..Guarantor: Covanta ARC LLC

....Hempstead Industrial Development Agency, NY 5% IRBs due 2010, Upgraded to Baa2 (12 - LGD2) from Baa3 (22 - LGD2)

Ratings Affirmed :

..Issuer: Covanta Holding Corporation

...Corporate Family Rating at Ba2,

...Probability of Default Rating at Ba2

...Speculative Grade Liquidity Rating at SGL-1

Ratings Affirmed / LGD assessments revised:

..Guarantor: Covanta ARC LLC

....Niagara County Industrial Devel. Agency, NY, Series 2001 IRBs at Baa2 (LGD2, 12% from LGD1, 7%)

....Delaware County Industrial Dev. Auth., PA, Series 1997-A IRBs at Ba1 (LGD3, 35% from LGD2, 27%)

....Connecticut Resources Recovery Authority, Ser. A and Ser. 1992 A IRBs at Ba1 (LGD3, 35% from LGD2, 27%)

Primarily a waste-to-energy company with a client base composed largely of local municipal governments, Covanta is headquartered in Fairfield, NJ. and during 2008, operating revenues were approximately $1.7 billion.

New York
A.J. Sabatelle
Senior Vice President
Global Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Managing Director
Global Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Covanta CFR at Ba2; assigns Ba3 to converts
No Related Data.
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