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Rating Action:

Moody's downgrades Waste Italia to B3, outlook negative

30 Sep 2015

London, 30 September 2015 -- Moody's Investors Service has today downgraded Waste Italia S.p.A.'s corporate family rating (CFR) to B3 from B2 and probability of default rating (PDR) to B3-PD from B2-PD. Moody's also downgraded the instrument rating of the €200 million senior secured notes to B3 from B2 and changed the outlook to negative from stable.

RATINGS RATIONALE

The downgrade reflects Waste Italia's weaker than expected cash flow and liquidity profile in the first half of 2015. The company generated negative Moody's-adjusted free cash flow of -€8.5 million in the period and fully drew down its €15 million revolving credit facility, resulting in a combined June 2015 liquidity position of €3.9 million in cash and approximately a similar amount of availability under uncommitted factoring and invoicing facilities. While first half 2015 cash flows were negatively affected by some non-recurring events and the liquidity position also reflects a seasonal working capital trough over the summer that should leave some room for improvement towards the fourth quarter of 2015, the company also faces sizeable mandatory repayments on the €200 million bond starting with €5 million within 30 days of delivering its annual accounts for 2015 (likely in Q2 2016) and rising to €7.5 million in 2016 (to be paid likely in Q2 2017). Moody's views the liquidity profile as not commensurate with a B2 rating as it leaves little flexibility to deal with unforeseen liquidity needs.

Moody's also expects that operating performance improvements originally anticipated for 2015 will be delayed after last 12 months to June 2015 company-reported EBITDA declined by -6.2% compared with 2014. Waste Italia suffered a delay in the preparation of the Albonese landfill in the first quarter of 2015, which led to waste being transferred to Geotea landfills at higher transportation costs. In addition, the Cavenago landfill was seized by the local authorities in the first quarter of 2015. While capacity is low in the landfill limiting the risk of ongoing negative effects on profitability if the situation persists, it nevertheless reduced EBITDA in the first half of the year. Given that waste producers, Waste Italia's clients, retain responsibility for the proper waste disposal, the seizure of the Cavenago landfill also carries some reputational risks for Waste Italia.

However, at the same time Waste Italia displayed progress in the second quarter with volume growth as the company accelerates disposals in the acquired Geotea landfills and benefits from a new brokerage contract related to the Albonese landfill. The pricing environment across the company's activities appears also on a positive trajectory. Nevertheless, given the delays in the first half of 2015 Moody's now expects reported EBITDA to remain largely flat and Moody's-adjusted debt/EBITDA at around 5x for 2015.

The rating also continues to incorporate Moody's expectation that no dividends will be paid to Waste Italia's parent Kinexia. Additionally, the rating currently does not anticipate any impact on Waste Italia from the proposed merger of Kinexia and Biancamano, including that it will not trigger the change of control covenant contained in the senior secured notes.

Rating Outlook

The negative outlook reflects Moody's view that liquidity is likely to remain low for a B3 rating unless cash flows materially improve and in the absence of additional committed credit lines or parent support. Particularly given the debt amortization starting in Q2 2016.

What Can Change The Rating Up/Down

Waste Italia's rating could come under pressure if (i) the company's liquidity and cash flow profile does not improve; (ii) Moody's adjusted debt/EBITDA rises above 5.5x; (iii) the company fails to extend landfill capacity in line with its current plans; (iv) EBITDA continues to decline. Conversely, while there is no near term upward rating pressure, a significantly improved liquidity profile together with; (i) the demonstration of sustained and visible free cash flow (after interest payments); (ii) a continued expansion of the company's operations and landfill capacity; and (ii) visible EBITDA growth could result in positive pressure. Moody's would also expect Moody's adjusted debt/EBITDA to fall towards 4.0x for positive pressure.

The principal methodology used in these ratings was Environmental Services and Waste Management Companies published in June 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Milan, Waste Italia is a waste management company based in Northern Italy. Its vertically integrated business operates in the collections, processing and recycling, landfill disposal and biogas, with a focus on non-hazardous special (commercial) waste. Its main regions of operations are Lombardy, Piedmont and, following the acquisition of Geotea, Liguria, where it has 7 service centres and depots operating a fleet of 150 vehicles (of which 65 are owned), 10 sorting and treatment plants and, following the sale of Alice Ambiente, 12 landfills sites of which 7 are active. In addition to this, the group operates through third party partnership agreements to provide waste management services throughout Italy. In the last twelve months to June 2015 Waste Italia had consolidated revenues of €122 million. Waste Italia is owned by Kinexia S.p.A. which is publicly listed on the Italian Stock Exchange.

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 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 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 rating action, and whose ratings may change as a result of this 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.

Tobias Wagner
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Waste Italia to B3, outlook negative
No Related Data.
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