News Column

Fitch Affirms Republic Services at 'BBB'; Outlook Stable

July 8, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the Issuer Default Ratings of Republic Services, Inc. (RSG) and its subsidiary Browning Ferris Industries, Inc. (BFI) at 'BBB'. Fitch has also affirmed the ratings for RSG's amended $1 billion senior unsecured credit facility due May 2017 and senior unsecured notes at 'BBB'. In addition, Fitch has affirmed BFI's senior unsecured rating at 'BBB'. The Rating Outlooks for RSG and BFI are Stable.

Fitch also assigns a rating of 'BBB' to RSG's new $1.25 billion senior unsecured credit facility due June 2019. This replaces the previous $1 billion credit facility set to mature April 2016. The new facility provides RSG with the option to increase commitments by up to $500 million.

Fitch's ratings apply to $5.9 billion of outstanding debt at March 31, 2014. A full list of rating actions follows at the end of this release.

Key Rating Drivers

RSG's ratings are supported by its consistently strong free cash flow (FCF) generation, stable operating profile, leading market position within the waste disposal business, and relatively stable credit metrics. As of March 31, 2014, leverage (Debt/Fitch-calculated EBITDA) stood at 3.03x, in line with Fitch's current expectations. Fitch expects leverage to generally remain around 3.0x over the intermediate term.

The current pricing environment remains relatively favorable for waste companies. During 1Q'14, RSG's average yield increased 1.2%, on top of a 1.3% increase in 2013. Fitch anticipates RSG will continue to prioritize pricing over volume in the intermediate term, with a willingness to shed business that does not meet its return hurdles. However, volumes will be supported by single-family housing starts, a leading indicator for volumes, which Fitch expects to rise by approximately 9.5% in 2014. RSG volumes rose 1.5% in the first three months of 2014, and 1% full year 2013, which represented the first full year of volume growth since 2006.

RSG's recent operating performance has been below Fitch's expectations. Fitch's expectations for EBITDA margins remain in the high 20% range in the intermediate term, although quarter-to-quarter performance could be affected by short-term disruptions, such as weather. Margins will be supported as RSG continues to realize efficiencies from recent initiatives, including an increased number of compressed natural gas (CNG) trucks and increased fleet automation. The company is also nearing the completion of its 'One Fleet' initiative. 'One Fleet' standardizes maintenance for all of RSG's vehicles, increasing fleet age and decreasing long term capital expenditures. Fitch believes the fleet automation and 'One Fleet' initiatives will provide long term margin benefits, while the benefit of CNG trucks will be somewhat dependent on CNG prices.

FCF (cash flow from operations less capex and common dividends) is expected to remain relatively strong and consistent in 2014 despite increased shareholder activities (dividends and share repurchases) and a relatively weak first quarter. The company's 2014 guidance decreases capital expenditures compared to recent years with the aforementioned initiatives winding down. The decrease will be offset by increased shareholder activities and higher cash tax payments from the lapsed legislation surrounding bonus depreciation. Fitch expects the FCF margin to remain between 3-4% in the intermediate term and support expected incremental shareholder activities and continued bolt-on acquisitions.

Fitch expects capital deployment to remain in line with previous expectations. RSG is expected to increase share repurchases in 2014 to approximately $400 million following a lower repurchase plan in 2013. Going forward, Fitch expects dividends to be larger than share repurchases, however they will be somewhat dependent on distribution of both capital expenditures and acquisition spending. Fitch notes that RSG views its investment-grade credit profile as strategically important, and it is expected to maintain credit metrics that are consistent with that view.

RSG's financial flexibility is solid. As of the end of 1Q'14, the company had $175 million in cash on hand and $1.5 billion in revolver capacity ($2.25 billion less $744.4 million in outstanding letters of credit). In addition to its strong liquidity, the company has no major debt maturities in the near term. RSG's two primary revolving credit facilities do not mature until May 2017 and June 2019, and none of its outstanding unsecured notes mature until 2018.

Rating Sensitivities (Fitch Forecasts in parentheses)

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Maintaining leverage (Debt/EBITDA) below 2.0x, similar to levels seen prior to the Allied acquisition (FY14: 2.9x);

--FCF margin consistently greater than 4% (FY14: 3%);

--Change in cash deployment strategy prioritizing debt over shareholder friendly activities.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Leverage rising to 3.25x or higher for a prolonged period;

--An inability to rebound from a period of FCF pressure to a FCF margin of 2-3%;

--An increase in debt funded share repurchases or dividends;

--A large debt funded acquisition that results in an elevated reset of the company's leverage target.

Fitch has affirmed the following ratings:

Republic Services, Inc.

--IDR at 'BBB';

--$1 billion senior unsecured bank credit facility at 'BBB';

--Senior unsecured long-term debt at 'BBB'.

Browning Ferris Industries, Inc.

--IDR at 'BBB';

--Senior unsecured debt at 'BBB'.

Fitch has also assigned the following new rating to Republic Services, Inc.:

--$1.25 billion senior unsecured bank credit facility 'BBB'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838574

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Chad Walker

Associate Director

+1-312-368-2056

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Stephen Brown

Senior Director

+1-312-368-3139

or

Committee Chairperson

Philip W. Smyth, CFA

Senior Director

+1-212-908-0531

or

Media Relations:

Brian Bertsch, +1-212-908-0549 (New York)

brian.bertsch@fitchratings.com


Source: Fitch Ratings


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