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Rating Action:

Moody's assigns a Baa2 rating to Philadelphia Project Finance, LLC's Series 2020 Sewage Sludge Disposal Revenue Refunding Bonds; outlook stable

19 Aug 2020

Approximately $49 million of debt securities

New York, August 19, 2020 -- Moody's Investors Service, ("Moody's") has assigned a Baa2 senior secured rating to Philadelphia Project Finance, LLC's $48.6 million Sewage Sludge Disposal Revenue Refunding Bonds, Series 2020. The outlook is stable.

The bonds will be issued by the Pennsylvania Economic Development Finance Authority and on-lent to the project company. The Series 2020 bond proceeds will be used to refinance and fully repay the outstanding Series 2009 bonds, which are rated Baa3. The rating on the Series 2009 bonds will be withdrawn following financial close of the Series 2020 bond offering.

RATINGS RATIONALE

The Baa2 rating continues to benefit from the essentiality of the biosolids treatment facility for the Greater Philadelphia area and the long-term service agreement with the Philadelphia Municipal Authority, PA (PMA). The service agreement provides for predictable payments of around $20-22 million per annum from the Philadelphia (City of) PA Water & Sewer Enterprise (Philadelphia Water Department, A1 stable), that are sufficient to cover debt service and anticipated operating costs through the tenor of the debt. Completion of the planned refinancing will improve operating cash flow by about 10% each year, thereby providing a greater cushion for bondholders. Moody's expects that the project will continue to process sewage sludge according to its specifications, receive the total service fee payment, and that the city will continue to deliver sewage sludge in excess of the minimum volume target of 49,000 dry tons.

Operating performance and debt service coverage ratios have shown a degree of volatility in recent years due to increased maintenance capital expenditures to enhance the operating efficiency of the plant and address faster than initially expected corrosion. Philadelphia Project Finance is starting to reap the benefits of these investments and debt service coverage ratio (DSCR) improved to 1.68x in 2019 from around 1.0x in 2017 and 2018. Moody's calculation of DSCR includes management fees as operating expenses and factors in maintenance capital expenditures. The planned refinancing is anticipated to add about 20 basis points of coverage in each year increasing the project's resiliency. 2020 year-to-date operating performance remains consistent with prior year performance and operations have not been materially impacted by the coronavirus (COVID-19) epidemic.

Moody's expects that the project can achieve DSCRs of 1.55x on average going forward based on similar volumes of dry tons as achieved on average over the period 2013-2019 (60,070 dry tons) and benefiting from the debt service savings (of about $900,000 annually) from the Series 2020 bond issuance. However, operating and related financial performance will likely experience some volatility depending on the volume and quality of processed dry tons.

The Baa2 rating is mostly constrained by the weaker credit quality of the ultimate parent Synagro Infrastructure Company, Inc., the lack of audited financial statements at the level of Philadelphia Project Finance, LLC, and the past volatility in DSCRs during 2013-2019. Philadelphia Project Finance, LLC provides unaudited financial statements and the annual service fee is also disclosed by the Philadelphia Water Department.

Lenders benefit from typical project finance features including a 1.2x twelve-month look-forward and look-back distribution test, a $4.9 million debt service reserve fund, the inability to co-mingle cash among entities and the presence of two independent directors. The project has strong economic incentives to be separate from the operations of its parent, all of which was tested in 2013 when the parent needed to restructure its debt in a bankruptcy proceeding. Synagro refinanced its term loan B in late 2018, reducing refinancing risk at the parent company level.

The project's liquidity is adequate. As of June 30, 2020, cash on the balance sheet was $11.1 million comprised of $3.1 million in the bond fund, $6.2 million in the debt service reserve fund, $1.5 million in the surplus fund, and $0.3 million in the capital replacement fund. Capital expenditure requirements are typically funded out of operating cash flow generation. Larger capital investments in 2017 and 2018 were supported by cash contributions from the parent of $2.0 million in 2017 and $1.9 million in 2018, a credit positive.

Moody's expects that the project will hold similar amounts of cash on balance sheet in future. Lenders will benefit from a $4.9 million debt service reserve, covering approximately 11 months of annual debt service.

RATING OUTLOOK

The stable rating outlook reflects our expectation that the project will perform according to its specifications and produce DSCRs around 1.5x after management fees through the cycle.

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

What could change the rating up

- Consistent operating performance and DSCR around 2.0x for a sustained period of time

- Improvements in the credit quality of parent company Synagro

- Publication of audited financial statements by the project company, Philadelphia Project Finance, LLC

What could change the rating down

- Bankruptcy filing of plant owner and operator Philadelphia Renewable Biofuels, LLC (PRB)

- Weakening credit quality of parent company Synagro

- DSCR below 1.4x on a sustained basis without any likely expectation for a recovery

Profile

Philadelphia Project Finance, LLC (PPF) is a special purpose entity. The project is a 220-dry ton per day capacity biosolids processing facility utilizing two Andritz DDS-110 drum dryers that process sewage sludge from all three Philadelphia water pollution control plants into Class A biosolids (pellets). The pellets are distributed or sold for use in horticulture, fuel, or mine reclamation applications. The Facility is owned by PPF and is operated by a special purpose entity, Philadelphia Renewable Biofuels, LLC (PRB) formed solely to operate the project. PRB and PPF are both indirectly, wholly owned subsidiaries of Synagro Infrastructure Company, Inc.

The principal methodology used in this rating was Generic Project Finance Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1194215. 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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

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.

Kathrin Heitmann
Vice President - Senior Analyst
Project 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

A.J. Sabatelle
Associate Managing Director
Project 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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