Approximately $400 million of Debt Securities Affected
New York, November 10, 2010 -- Moody's Investors Service assigned a Ba3 rating to Covanta Holding
Corporation's (Covanta) planned issuance of senior unsecured notes.
Covanta's rating outlook is stable.
Concurrent with this rating assignment, Moody's affirmed all of
Covanta's ratings, including the Corporate Family Rating (CFR)
and Probability of Default Rating at Ba2, the ratings on all existing
senior unsecured debt at Ba3, and the speculative grade liquidity
rating at SGL-1. Additionally, Moody's assigned ratings
to a shelf registration at Covanta for the issuance of senior unsecured
debt and preferred stock at (P)Ba3 and at (B2), respectively,
and Moody's affirmed all of Covanta Energy Company's (CEC)
ratings, including all senior secured bank facilities at Ba1.
..Issuer: Covanta Holding Corporation
....Multiple Seniority Shelf, Assigned
a range of (P)B2 to (P)Ba3
....Senior Unsecured Regular Bond/Debenture,
Assigned 82 - LGD5 to Ba3
Covanta's rating recognizes the continued generation of relatively consistent
credit metrics supported by a diversified, largely contracted portfolio
of energy-from-waste (EfW) projects principally located
throughout the US. The rating incorporates the strong operating
performance of the portfolio and the relatively high barriers to entry
for most competing technologies. These strengths are mitigated
by the highly leveraged capital structure that remains in place as well
as the degree of structural subordination that exists at the Covanta level.
Approximately $877 million of secured project level debt is senior
to holding company debt at CEC and at Covanta. In most cases,
documentation in the project level debt agreements includes a restricted
payments test which must be satisfied in order for dividends to be paid
to CEC and Covanta.
The rating recognizes that a large portion of Covanta's project level
debt will amortize over the next five years. While such amortization
will reduce the degree of structural subordination and strengthen overall
credit quality, the amortization payments represent a sizeable required
call on cash flow over that period. Covanta's current Ba2 CFR incorporates
our view that such debt amortization will likely be replaced by additional
project or corporate level debt to finance new development projects and/or
acquisitions. The rating factors in the expected benefit from the
Veolia EfW asset acquisition which is on track to add approximately $60
million in annual EBITDA during 2010, and acknowledges that the
portfolio will become more exposed to merchant commodity risk over the
next several years.
Covanta's financial metrics remain fairly stable and well-positioned
in the "Ba" rating category for unregulated power companies. For
example, cash flow (CFO-preW/C) to debt averaged 15.8%
for the three period 2007-2009 and was 16.1% during
LTM September 30, 2010. Similarly, the cash flow interest
coverage ratio remained consistent at around 4.0x for the three
year period 2007-2009 and at LTM September 30, 2010.
We also observe the negative impact on retained cash flow and free cash
flow for 2010 following the implementation of a $233 million special
dividend during the third quarter 2010. We also note Covanta's
board authorization of a $150 million share repurchase plan during
third quarter 2010, allowing for the repurchase of $37 million
of shares during the quarter. Moody's believes that the amount
and timing of any subsequent shareholder rewards program will depend upon
the company's ability to find attractive internal and external EfW-related
investment opportunities, given the current expectation for free
cash flow generation.
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
ample cash balances and access to committed credit availability.
At September 30, 2010, Covanta had $174 million in
required project debt maturities due over the next twelve months,
all of which will be met by funded reserve accounts at the project level.
Other debt maturities coming due over the next 12 months are only $6.8
million. Unrestricted cash on hand at Covanta at 09/30/2010 was
around $77 million. As mentioned, free cash flow generation
is likely to be used to invest in development projects, to fund
acquisitions or to fund shareholder rewards programs. Covanta's
cash flow is expected to continue benefitting from the utilization of
net operating loss carryforwards (NOLs). At December 31,
2009, Covanta had approximately $545 million of NOLs.
In addition to the $77 million of unrestricted cash, the
company had availability of around $326 million under two credit
facilities that expire in 2013 and 2014. As of September 30,
2010, the company was in compliance with all of the financial covenants
under its credit facilities.
Net proceeds from the offering will be primarily used to fund a tender
offer to purchase for cash any and all of the 1.0% senior
unsecured convertible securities due 2027, of which there is $373.8
million currently outstanding. According to the terms of the convertible
indenture, holders have the right to put the securities to Covanta
on three different dates over the life of the securities, including
February 1, 2012. Covanta expects the holders of these securities
to utilize this option and due to favorable market conditions for high
yield issuers, the company is addressing today this potential call
on future capital. The new senior unsecured notes will rank pari
passu with all present and future senior unsecured indebtedness of Covanta
and will be structurally subordinate to indebtedness of CEC.
The stable outlook on Covanta's rating reflects Moody's expectation that:
(i) the EfW projects' contracts with their respective municipalities and
utilities will remain in place through their current maturities and that
the company will continue to have success in 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 continue to finance its development projects,
acquisitions, and future shareholder return strategies in a manner
neutral to credit quality.
Upward rating pressure could surface if Covanta successfully extends its
contracts on favorable terms, and finances new development in a
reasonably conservatively fashion leading to some de-levering and
resulting in 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 a 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.
The principal methodologies used in this rating were Global Unregulated
Utilities and Power Companies published in August 2009, and Loss
Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Primarily a waste-to-energy company with a client base composed
largely of local municipal governments, Covanta is headquartered
in Fairfield, NJ. During 2009, operating revenues were
approximately $1.6 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating 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 ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service 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 the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Infrastructure Finance Group
Moody's Investors Service
William L. Hess
MD - Utilities
Infrastructure Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Ba3 rating to Covanta's senior unsecured notes; outlook stable
250 Greenwich Street
New York, NY 10007