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Rating Action:

Moody's assigns Ba2 to Covanta's $335 million unsecured tax-exempt offering; Upgrades secured RC and TL to Baa3 from Ba1; outlook stable

31 Oct 2012

Approximately $1.535 billion of debt securities and credit facilities affected

New York, October 31, 2012 -- Moody's Investors Service today assigned a Ba2 rating to Covanta Holdings Corporation's (Covanta) planned issuance of approximately $335 million in senior unsecured tax-exempt revenue bonds to be offered as five separate series. As part of this transaction, Moody's upgraded Covanta Energy Corporation's (CEC) $900 million senior secured revolver credit facility and its $298 million secured term loan to Baa3 from Ba1. Concurrent with these rating actions, Moody's affirmed all of the remaining Covanta's ratings, including its Corporate Family Rating (CFR) and Probability of Default Rating at Ba2, its senior unsecured debt rating at Ba3 and its speculative grade liquidity rating at SGL-1. The rating outlook for Covanta and CEC is stable.

RATINGS RATIONALE

Today's rating actions recognize the continued generation of relatively consistent credit metrics, including reliable free cash flow generation, all of which is supported by a diversified, largely contracted portfolio of energy-from-waste (EfW) projects principally located throughout the US. The rating actions consider Covanta's successful track record in continuing to lengthen the duration of its contract portfolio through contract extensions (have extended 20 of 21 expiring waste contracts), which provides a dependable source of operating income and cash flow for the next decade. The rating actions incorporate the strong operating plant performance across the portfolio and the relatively high barriers to entry for most competing technologies. These strengths are mitigated by a highly leveraged capital structure that remains in place as well as a shareholder focused strategy being pursued by management, including the board's decision earlier this year to authorize an additional $100 million in share repurchases to be added to the existing share repurchase program and to raise the common dividend by 100% (to $80 million annually).

The rating actions acknowledge the credit benefits to CEC and Covanta from the continued amortization of project level debt. We calculate that since year-end 2007, project level debt has reduced by $581 million to $628 million at 09/30/2012. Covanta's planned issuance of $335 million will redeem $328 million of secured project level debt at three subsidiaries reducing project level debt to approximately $300 million. Also, through the end of fiscal 2015, we calculate that an additional $177 million of project level will amortize, resulting in project level debt being only approximately $125 million by year-end 2015. Such project debt reduction lowers the degree of structural subordination which strengthens credit quality at CEC and at Covanta.

To that end, the Ba2 rating assignment, in line with Covanta's CFR, factors in the upstream guarantee from CEC, an entity that continues to move closer to the asset level cash flows as project level debt is repaid. Moreover, the upgrade of CEC's secured revolver and term loan to Baa3 from Ba1 recognizes the strengthened position for these classes of creditors given their secured position in Covanta's increasing number of debt free projects.

Covanta's financial metrics remain fairly stable and well-positioned in the "Ba" rating category for unregulated power companies. For example, for the three period 2009-2011, cash flow (CFO-preW/C) to debt averaged 15.2%, retained cash flow to debt 12.3%, free cash flow to debt 8.0%, while cash flow interest coverage ratio remained consistent at around 4.0x. Prospectively, we tend to believe that Covanta should be able to generate similar credit metrics over the next several years due to the high degree of contractual revenue coupled with the firm's unique competitive position, which has very high barriers for entry.

For more information on Covanta, please refer to the most recent Credit Opinion, which can be found on moodys.com.

Covanta`s SGL-1 is driven by our expectation that the company will maintain a very good liquidity profile over the next 4 quarters as a result of its generation of strong internal cash flows, continuance of cash balances and access to committed credit availability. In addition to the company's ability to generate reoccurring free cash flow, at September 30, 2012, Covanta had approximately $262 million of unrestricted cash, although we understand that more than half of this cash is invested in non-US accounts to be used for future international investment. In addition to the cash on hand, Covanta had access to availability of around $597 million under a $900 million credit facility that expires in 2017. During fiscal year 2013, we understand that Covanta has $54 million in required project debt maturities due, a portion of which has been funded with restricted cash available for debt service. The next large debt maturity at Covanta is the $460 million of senior notes due in June 2014. As of December 31, 2011, Covanta was comfortably in compliance with the financial covenants under its credit facilities.

Net proceeds from the senior unsecured tax-exempt debt offering along with the release of restricted cash will be primarily used to refinance six separate series of previously issued tax-exempt senior secured debt that collectively aggregate $328 million. As a tax-exempt issuance, the issuer for $169,595,000 of the new offering will be Massachusetts Development Finance Agency, to be issued in three series with a maturity of November 1, 2027 for Series 2012A ($20,000,000) and a maturity of November 1, 2042 for each of Series 2012B and Series 2012C ($67,225,000 and $82,370,000, respectively). The remaining $165,010,000 will be issued by Niagara Area Development Corporation in two series with a maturity date of November 1, 2042 for Series A ($130,000,000) and a maturity date of November 1, 2024 for Series B ($35,010,000). Covanta will be the obligor on each of the five series of new bonds with Covanta's obligation being guaranteed by CEC.

Upon the completion of the financing and satisfaction of the existing debt, Moody's would expect to withdraw the Baa2 rating on the four series of senior secured debt aggregating $165,010,000 issued by Niagara County Industrial Development Agency along with the Baa2 rating on the approximate $81,000,000 (original amount $134.35 million) senior secured debt issued by Massachusetts Development Finance Authority.

The stable outlook for Covanta and CEC reflects Moody's expectation that: (i) the EfW projects' contracts with the respective municipalities and utilities will remain in place through their current maturities and that the company will continue to have success extending the terms on expiring EfW contracts; (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; and (iii) Covanta will finance its development projects, acquisitions, and future shareholder return strategies in a manner neutral to credit quality.

In light of the highly levered capital structure and increasing efforts to return capital to shareholders, near-term rating changes remains limited. However, a higher CFR for Covanta could be considered if Covanta successfully extends its contracts on favorable terms, pursues shareholder rewards in a credit benign fashion, and finances new development reasonably conservatively leading to some de-levering and resulting in a financial improvement such that cash flow to debt exceeds 18% and cash flow coverage of interest expense exceeds 4.5x on a sustainable basis.

The ratings could be lowered if the company significantly increases leverage to finance an acquisition or return capital to shareholders; if several projects are subject to unforeseen capital expenditure requirements, particularly with regard to environmental regulatory compliance; if several key projects have extended outages; resulting in a decline in key financial metrics including the ratio of cash flow to debt falling below 12% and cash interest coverage declining to below 3.0x for an extended period.

Ratings Affected Include:

Ratings Affirmed :

..Issuer: Covanta Holding Corporation

...Corporate Family Rating at Ba2

...Probability of Default Rating at Ba2

...Speculative Grade Liquidity Rating at SGL-1

Rating Assigned

..Issue: $20,000,000 sr uns Massachusetts Devt Fin Agy Resource Recovery Rev Bonds Series 2012A due 11/1/2027. Obligor: Covanta; Guarantor: CEC; Assigned Ba2 (45 --LGD3)

..Issue: $67,225,000 sr uns Massachusetts Devt Fin Agy Resource Recovery Rev Bonds Series 2012B due 11/1/2042. Obligor: Covanta; Guarantor: CEC, Assigned Ba2 (45 --LGD3)

..Issue: $82,370,000 sr uns Massachusetts Devt Fin Agy Resource Recovery Rev Bonds Series 2012C due 11/1/2042. Obligor: Covanta; Guarantor: CEC, Assigned Ba2 (45 --LGD3)

..Issue: $130,000,000 sr uns Niagara Area Dev Corp Solid Waste Disposal Facility Refunding Rev Bonds Series 2012A due 11/1/2042. Obigor is CVA; Guarantor is CEC, Assigned Ba2 (45 --LGD3)

..Issue: $35,010,000 sr uns Niagara Area Dev Corp Solid Waste Disposal Facility Refunding Rev Bonds Series 2012A due 11/1/2042. Obigor is CVA; Guarantor is CEC, Assigned Ba2 (45 --LGD3)

Ratings Upgraded:

..Issuer: Covanta Energy Corporation

Senior Secured Term Loan and Revolving Credit Facility to Baa3 (13-LGD2) from Ba1 (23 --LGD2)

Ratings Affirmed / LGD assessments revised:

..Issuer: Covanta Holding Corporation

Senior Unsecured Conv./Exch. Bond/Debenture at Ba3 (79 - LGD5) from Ba3 (75 - LGD5)

..Guarantor: Covanta ARC LLC

....Delaware County Industrial Dev. Auth., PA, Series 1997-A IRBs at Ba1 (LGD3, 35% from LGD3, 32%)

....Connecticut Resources Recovery Authority, Ser. A and Ser. 1992 A IRBs at Ba1 (LGD3, 35% from LGD3, 32%)

Ratings expected to be Withdrawn at Financial Close:

$40.0 million senior secured Niagara County Industrial Dev Agency, NY, due 11/15/2026 rated Baa2 (Cusip: 653362AG8)

$45.0 million senior secured Niagara County Industrial Dev Agency, NY, due 11/15/2024 rated Baa2 (Cusip: 653362AH6)

$45.0 million senior secured Niagara County Industrial Dev Agency, NY, due 11/15/2024 rated Baa2 (Cusip: 653362AJ2)

$40.0 million senior secured Niagara County Industrial Dev Agency, NY, due 11/15/2024 rated Baa2 (Cusip: 653362AK9)

$81 million (originally $134 million) senior secured Resource Recovery Rev Bonds rated Baa2 (SEMASS System) (Sale ID: 805775771)

The principal methodology used in rating : Covanta Holdings Corporation (CVA) and Covanta Energy Corporation (CEC) was the Unregulated Utilities and Power Companies Industry Methodology published in August 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Morristown, NJ, Covanta is primarily an owner and operator of Energy-from-Waste (EfW) and renewable energy projects. During 2011, operating revenues was approximately $1.6 billion.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

A.J. Sabatelle
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns Ba2 to Covanta's $335 million unsecured tax-exempt offering; Upgrades secured RC and TL to Baa3 from Ba1; outlook stable
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