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Rating Action:

Moody's affirms EnviroSolutions; CFR at Caa2, outlook stable

25 Jul 2008
Moody's affirms EnviroSolutions; CFR at Caa2, outlook stable

New York, July 25, 2008 -- Moody's Investors Service affirmed its debt ratings of EnviroSolutions Holdings, Inc. and EnviroSolutions Real Property Holdings, Inc. (together "EnviroSolutions"); corporate family and probability of default, each of Caa2, senior secured of Caa1. The outlook is stable.

The change in outlook to stable follows the resolution of the liquidity pressures that commenced in the fall of 2007 when EnviroSolutions fell out of compliance with one of the financial covenants in its credit facility. Access to the facility was critical for the company as it faced cash requirements related to the build-out and start up of new facilities as well as a significant earn-out payment that became payable in May 2008. The company has taken actions to resolve these issues, including extending the payment period for the earn-out obligation, amending its revolving credit agreement in a way that regains access to the facility, and receiving a sizeable equity contribution to help fund an expected free cash flow deficit over the next 12 to 18 months.

The affirmation of the ratings reflects Moody's belief that significant improvement in the company's earnings and free cash flow performance over the next 12 to 24 months is not likely because of the current challenging demand environment and significant capital expenditures. Moody's also believes that it will take many months for EnviroSolutions to contract a significant portion of the incremental transfer station capacity that it is creating in the NY/NJ metro market by completing the build-out of its DART (Doremus Avenue Recycling and Transfer) facility in Newark, N.J. This will extend the period required to realize the anticipated returns on this investment.

The Caa2 corporate family rating reflects the expectation that margins and funds from operations will remain weak over the next 12 to 24 months because of continuing soft demand for the company's waste services and because of relatively lower pricing power than that of its larger peers. EnviroSolutions sources a majority of its revenue under multi-year contracts with municipal customers. This provides less flexibility to raise prices than do shorter-term commercial agreements. Moody's also anticipates significant negative free cash flow over this period as EnviroSolutions expands the DART facility. However, the combination of cash on hand and leasing of certain equipment should cover the next 12 months free cash flow deficit, although with little cushion to absorb a shortfall from its forecasted earnings.

The stable outlook reflects the belief that downside risk in the credit has been moderated with the resolution of the liquidity pressures, and that the funding arrangements that have been arranged should provide EnviroSolutions with adequate financial flexibility until its operating trends improve. The company should maintain compliance with the revised financial covenants over at least the next 12 to 18 months. Moody's believes that credit metrics are not likely to improve significantly over this period; however, liquidity is adequate for EnviroSolutions to maintain its current operations and fund its existing capital investment plans. The ratings could be downgraded if EBITDA was to decline from the LTM March 31, 2008 level, or if maintaining compliance with financial covenants becomes questionable. The ratings could be upgraded if credit metrics meaningfully improve from LTM March 31, 2008 levels or if EnviroSolutions demonstrates the ability to sustain positive free cash flow.

Outlook Actions:

..Issuer: EnviroSolutions Holdings, Inc.

....Outlook, Changed To Stable From Negative

..Issuer: EnviroSolutions Real Property Holdings, Inc.

....Outlook, Changed To Stable From Negative

LGD Assessments:

..Issuer: EnviroSolutions Real Property Holdings, Inc.

....Senior Secured Bank Credit Facility, Changed to LGD3, 36% from LGD3, 40%

EnviroSolutions Holdings, Inc., based in Manassas, Virginia, is an integrated solid waste management company with a presence in Virginia, Maryland, New Jersey, Kentucky, West Virginia and the District of Columbia. The company's assets include three landfills, four transfer stations and several hauling and collection operations.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Jonathan Root
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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