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Rating Action:

Moody's assigns B3 to LRS Holdings' CFR and senior secured debt; outlook stable

03 Aug 2021

Approximately $400 million of rated debt instruments

New York, August 03, 2021 -- Moody's Investors Service ("Moody's") assigned first-time ratings to LRS Holdings, LLC (aka Lakeshore Recycling Systems, "LRS"), including a B3 corporate family rating ("CFR"), B3-PD probability of default rating and a B3 rating on the company's proposed senior secured bank (first lien) credit facility, consisting of revolving credit and term loan facilities. The outlook is stable.

The net proceeds from the $300 million first lien term loan B, along with new sponsor equity (Macquarie) as well as rollover equity, will be used primarily to fund the buyout of LRS, including the repayment of all of its existing debt and cover transaction expenses. As part of the transaction, the company will also issue a $23 million delayed draw term loan to support acquisitions and a new $75 million 5-year revolving facility, which is not expected to be drawn at transaction close.

Moody's took the following actions for LRS Holdings, LLC:

Assignments:

..Issuer: LRS Holdings, LLC

.... Corporate Family Rating, Assigned B3

.... Probability of Default Rating, Assigned B3-PD

....Senior Secured First Lien Term Loan,Assigned B3 (LGD4)

....Senior Secured First Lien Delayed Draw Term Loan, Assigned B3 (LGD4)

....Senior Secured First Lien Revolving Credit Facility, Assigned B3 (LGD4)

Outlook Actions:

..Issuer: LRS Holdings, LLC

....Outlook, Assigned Stable

RATINGS RATIONALE

The ratings reflect LRS' modest scale, with a primary regional focus in the US Midwest (mainly the Chicago area), its aggressive pace of acquisitive growth, which limits visibility into sustainable run-rate earnings, and a lack of a track record of positive earnings and free cash flow. The free cash flow profile is constrained in part by growth capital expenditures. The company's markets are fragmented and competitive, increasing the likelihood of further acquisitions to accelerate growth. A sizeable portion (43%) of waste collections are recycled/diverted primarily at cost and expose LRS to some commodity price volatility at roughly 5% of revenue. This poses the challenge of pricing waste collections/contracts adequately and running cost efficient operations amid inflationary pressures to achieve an adequate return. While LRS has annual price escalators, this may not always fully offset the rate of cost increases. The company will likely face margin pressures from SG&A and labor cost inflation amid a tight labor market, including driver capacity. Nevertheless, there is positive momentum in the business, with good drivers for improving profitability. Recent contract wins along with ongoing efficiency initiatives and earnings realization from acquisitions already undertaken should support higher EBITDA margins into 2022, which could exceed 20% with good execution. Debt-to-EBITDA should also fall towards a mid 4x range over the next year, from above 5x in 2021 (all ratios including of Moody's standard adjustments).

The ratings also reflect LRS' strong market position in the Chicago metro area and expanding presence in the US Midwest, and contracts averaging 3-5 years that provide a base of recurring revenue. Steady municipal solid waste volumes, underpinned by 5-year contracts, help offset the exposure of the company's commercial/construction and demolition business to the economic cycle. Investments in key infrastructure assets, including strategically-located facilities, transfer stations and a landfill that has enabled vertical integration, provide barriers to entry. These assets also make LRS well-positioned to meet demand in its core markets longer term. Longstanding customer relationships translate into a high renewal rate, although this is an industry characteristic and does limit organic growth prospects. A focus on improving efficiencies, including optimization of collection routes and pricing collections above inflation, should support higher returns over time.

Moody's expects LRS to have adequate liquidity, with nominal cash levels balanced by expectations of ample availability under the new $75 million revolver and free cash flow (cash flow from operations less gross capital expenditures less dividends) turning modestly positive over the next year on higher earnings. Capex is relatively high and expected to rise through 2022, including for fleet renewal. Approximately 20% of the truck fleet is over 16 years of age. Scaling back growth capital spending closer to maintenance levels would drive stronger free cash flow. The revolving credit facility will likely be tapped periodically for working capital or bolt-on acquisitions to build scale. The facility will be subject to a springing first-lien net leverage covenant (maximum 6.2x proposed), tested if borrowings exceed 35% of the revolver commitment. The term loan B and delayed draw term loan are not expected to have any financial maintenance covenants.

The stable outlook reflects Moody's expectation of improving waste volumes, led by a pick-up in construction and demolition activity, to support moderate organic top-line growth and margin expansion through 2022. Moody's expects inbound waste collections to be priced with sound economics for the company, which along with recent contract wins and ongoing efficiency improvements should drive margin enhancement. Moody's also expects LRS to maintain adequate liquidity over the next 12 to 18 months.

Environmental factors are a key consideration, given LRS operates in an essential services industry and the business model should benefit from regulatory requirements as well as increased awareness of environmental concerns driving demand for the company's waste disposal and recycling services. The company's strong focus on diverting waste from landfills and environmental sustainability has provided benefits, including a recently awarded meaningful contract for a city recycling program. These factors should support the credit metrics longer term. Moody's believes LRS complies with environmental laws and regulations and obtains the necessary government permits to operate its landfill and collection/sorting facilities, with no material issues disclosed to date.

Corporate governance risk is highlighted by the potential for aggressive financial policies given the company's ownership by a private infrastructure fund and its acquisitive nature, which creates uncertainty and poses execution risks, and could drive weaker metrics or liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be downgraded with a material decline in revenue and/or no earnings growth or margin expansion, including from deteriorating business conditions, the loss of a contract or inability to manage costs efficiently. Debt-to-EBITDA expected to remain above the 5.5x or EBIT-to-interest below 1x could also lead to a downgrade. A weaker liquidity profile, including Moody's expectation of sustained negative free cash flow, diminishing revolver availability or increasing reliance on the revolver for working capital needs could also lead to lower ratings. Additionally, unsuccessful integration of acquisitions or debt-funded transactions that weaken credit metrics or liquidity would also drive downwards rating pressure.

The ratings could be upgraded with profitable expansion in scale beyond the company's current footprint, including material improvement in earnings with stronger margins, such that debt-to-EBITDA is sustained below 4.5x and EBIT-to-interest remains at or above 2x. The maintenance of good liquidity, including consistent positive free cash flow with free cash flow to debt of at least 5%, and EBIT margins sustained in the mid to high single digit range would also be a prerequisite for an upgrade.

Following are some of the preliminary terms in the marketing term sheet that are subject to change during syndication:

The senior credit facility is expected to contain flexible covenants for transactions that, if undertaken, could adversely affect creditors. This includes (but is not limited to) incremental facility capacity up to the sum of: (a) the greater of $74.5 million and the EBITDA equivalent percentage (to be defined); (b) amounts replacing any terminated commitments or repaid term loans under the credit agreement; (c) amounts incurred to extend the maturities of any credit facility; (d) amounts replacing reductions in revolver commitments and any voluntary prepayments or permanent commitment reductions on the initial or incremental term loans. An unlimited additional amount is permitted so long as the First Lien Net Leverage Ratio does not exceed the greater of (i) 4.0x and (ii) in the case of permitted acquisitions or other investments, the ratio immediately prior to incurring such indebtedness. For junior incremental debt, the Secured Net Leverage Ratio does not exceed the greater of (i) 5.0x and (ii) if incurred due to a permitted acquisition or other investment, the ratio immediately prior to incurring such indebtedness.

There are no express "blocker" provisions that prohibit the transfer of specified assets to unrestricted subsidiaries. Only wholly-owned subsidiaries are required to provide subsidiary guarantees, posing risks of potential guarantee release if there were a partial change in ownership. There is also no explicit protective language limiting such releases.

LRS Holdings, LLC (aka Lakeshore Recycling Systems), headquartered in Morton Grove, Illinois, provides waste collection, disposal and recycling services for residential, commercial and roll-off customers in Chicago, Wisconsin and surrounding regions in the US Midwest. LRS also provides adjacent ancillary services of street sweeping and renting portable restrooms for construction sites, parks and outdoor events. Revenue approximated $224 million (on a reported basis) for the latest twelve-month period ended March 31, 2021. LRS Holdings, LLC will become a portfolio company of a private infrastructure fund affiliated with Macquarie following completion of its acquisition of LRS.

The principal methodology used in these ratings was Environmental Services and Waste Management Companies published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113573. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Yvonne Njogu
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Dean Diaz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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