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Rating Action:

Moody's assigns Ba3 rating to Covanta's new senior unsecured notes; outlook negative

02 Mar 2017

Approximately $400 million of Debt Securities Rated

New York, March 02, 2017 -- Moody's Investors Service, ("Moody's") assigned a Ba3 rating to Covanta Holding Corporation's (Covanta) $400 million of Senior Unsecured Notes. Covanta's Corporate Family Rating of Ba2 and the Probability of Default Rating of Ba2-PD are unchanged. Also, the company's speculative grade liquidity rating of SGL-3 is unchanged. Covanta's rating outlook is negative.

RATINGS RATIONALE

Covanta's ratings reflect the company's generally stable cash flows from the waste disposal and service revenues at its Energy-from-Waste (EfW) projects, which represent approximately 70% of consolidated revenues. The ratings also incorporate Covanta's strong operating performance across the portfolio and the high barriers to entry for most competing technologies. However, these factors are offset by Covanta's exposure to lower natural gas prices as well as wholesale power and metals markets, a levered capital structure, an aging fleet with increasing operating expenses, persistent challenges to expand the business, and a record of shareholder friendly actions.

Covanta's operating cash flows have declined as a result of weakened commodity prices that impact the company's non-contracted segment of its revenue stream. The lower revenue coincided with an increase in its debt level to fund the construction of the new EfW facility in Dublin, Ireland, as well as the increased use of its revolver to fund the gaps between lower cash flow and higher dividends.

The negative rating outlook reflects Moody's expectation that commodity prices, including natural gas, power and metal prices, are unlikely to improve materially over the next 12-18 months. As a result, Covanta's credit metrics are expected to be weaker and could fall below the levels appropriate for the Ba2 CFR. Covanta's key metrics will likely continue to be pressured as Covanta continues to increase its leverage to fund the Dublin project and draws further on its revolver for its internal cash needs.

Rating Outlook

Covanta's negative outlook is also based on the company's shareholder friendly activities, as it has maintained high dividends and pursued share buybacks in the face of declining revenues and margins from its wholesale power and metals segment.

Liquidity Profile

Covanta's SGL-3 rating is driven by the expectation that the company will maintain an adequate liquidity profile over the next 12 months. The company's operating cash flows are likely to be stable but lower, due to weakened wholesale energy and metals prices as well as higher capital expenditure. Covanta is likely to draw further from its revolver to make up for the funding gap. Moody's does not expect the company's negative free cash flow position to improve until 2018 when the Dublin project is fully operational.

What Could Change the Rating -- Up

Covanta's outlook could be stabilized if there is an improvement in its credit metrics such that its CFO pre-WC to debt increases to above 11% on a sustained basis during the construction of its new Dublin facility through 2017, and closer to the mid-teens level after that facility is completed and fully operational in 2018. Also, an unexpected improvement in natural gas and metal prices resulting in higher cash flow from its wholesale power and metals segments could lead to a stable outlook.

What Could Change the Rating -- Down

A downgrade could be considered if Covanta is unable to renew or extend its EfW project contracts at competitive terms; if its exposure to energy and metals markets continues to pressure earnings or increase volatility in cash flow; if leverage is significantly increased shareholder-friendly financial policies continue; if several key projects have extended outages; or there is a continued decline in the key financial metrics including CFO pre-WC to debt falling below 11% on a sustained basis. Significant investments in developing markets without a record of contract enforceability could result in additional downward pressure on the rating.

Headquartered in Morristown, New Jersey, Covanta Holding Corporation is a developer, owner and operator of infrastructure for the conversion of waste to energy projects, as well as other waste disposal and renewable projection in the Americas, Europe and Asia.

The principal methodology used in this rating was Unregulated Utilities and Unregulated Power Companies published in Octoober 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 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.

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

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.

Jairo Chung
Analyst
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

Jim Hempstead
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

No Related Data.
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