KEY RATING DRIVERS
The ratings are supported by WM's strong cash flow generation, leading market position within the environmental service industry, stable credit metrics, and consistent capital deployment strategies. Fitch expects WM to manage its capital structure and capital deployment plans within its current financial strategy of maintaining solid liquidity alongside stable leverage (Total Debt/Fitch adjusted EBITDA) around 3.0x compared to current leverage of 2.76x as of
Fitch believes the recently announced
Fitch expects WM's capital deployment plans going forward to be focused on organic and inorganic growth, followed by shareholder friendly activities. WM expects to receive cash proceeds of
The environmental services industry largely provides stable cash flow generation and strong financial flexibility. Fitch expects WM's 2014 free cash flow (FCF) (cash flow from operations less capital expenditures and common dividends) to be approximately
Pricing trends within the environmental services industry have been favorable following the downturn, especially for the larger operators like WM. Fitch expects pricing trends to remain strong, with overall average yield growing in the 1.5-2.0% range, largely driven by open market pricing gains offsetting below average CPI-based contracts. WM has been proactive following an updated pricing strategy announced in 2013 focused on increasing ROIC on each contract. WM is an industry leader with regards to service, which is leading customers to accept price increases.
Although Fitch views WM's pricing strategy favorably and believes future benefits will continue to be realized, volumes have been negatively affected. Municipal contracts and national accounts have been the largest drivers of negative volume in 2013 and 2014. Fitch expects volumes to be slightly improved in 2015, with no large contract or account losses, while some customers have returned to WM after experiencing service issues with other operators.
Rating concerns are generally focused on strategy, both financial and operating. Following the 2014 divestitures, WM has returned to a more core environmental services company. Fitch views this as a long-term positive, however WM has made non-core acquisitions in the past, and this continues to be a potential rating concern. A change in the company's financial strategy could potentially pressure financial flexibility, given the industry's capital intensity and WM's capital deployment plans going forward.
Financial flexibility remains strong. As of the end of the second quarter, WM had total liquidity of
WM's debt maturity schedule is well-staggered and manageable, with the only significant upcoming maturity consisting of a
RATING SENSITIVITIES (Fitch Forecasts in parentheses)
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Maintaining leverage (Total Debt/Fitch-Adjusted EBITDA) below 2.5x for a prolonged period;
--FCF margin consistently greater than 5% (FY14: 3.0%);
--A change to a more conservative financial strategy.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Leverage reaching 3.25x for a prolonged period;
--Inability to rebound from a period of FCF pressure to a FCF margin of approximately 2-3%;
--Debt funded share repurchases or dividends or a large debt funded acquisition;
--A change to a less conservative financial strategy.
Fitch has affirmed WM's ratings as follows:
Waste Management, Inc.
--IDR at 'BBB',
--Senior Unsecured Credit Facility at 'BBB',
--Senior Unsecured Debt at 'BBB'.
The Rating Outlook is Stable.
--'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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