Fitch also assigns a rating of 'BBB' to RSG's new
Fitch's ratings apply to
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
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
RSG's financial flexibility is solid. As of the end of 1Q'14, the company had
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';
--Senior unsecured long-term debt at 'BBB'.
--IDR at 'BBB';
--Senior unsecured debt at 'BBB'.
Fitch has also assigned the following new rating to Republic Services, Inc.:
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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