The debt of two waste management companies tanked last week on negative earnings news, leading some investors to cry foul and accuse the companies and their underwriters of failing to conduct proper due diligence. Waste Services' 9 1/2% notes of '14 dropped 12 points while Gundle/SLT Environmental's bank debt traded to the low 80s. Waste Services' bonds dropped on disappointing earnings before interest, taxation, depreciation and amortization and a Moody's Investors Service downgrade to Ca from Caa1. The rating agency is also maintaining a negative outlook on the $160 million of debt sold in April by Lehman Brothers. "It's extremely disappointing for the credibility of Waste Services when it has brought a deal without making one single coupon payment. That's not a very good introduction to Wall Street," said Paulo Silva, portfolio manager at Penn Capital Management in Cherry Hill, N.J., who does not own its bonds. "It's also a bad reflection on Lehman. They haven't done their due diligence on the name," he added. Jim Merli, head of debt syndicate at Lehman in New York, declined comment and Ronald Rubin, executive v.p. and cfo of Waste Services in Ontario, did not return calls.
Catherine Guinee, v.p. and senior credit officer at Moody's, said the Waste Services downgrade followed disappointing EBITDA of $40 million and noted the company violated two of its covenants: its total leverage ratio and its EBITDA-to-interest ratio. One distressed debt analyst noted the deal was sold under the premise that Waste Services would achieve EBITDA around $70 million. Guinee added that, with these covenant violations, Waste Services is in technical default and cannot draw down on its existing credit facility until those violations are waived or amended. "It's certainly unusual to violate covenants in the first quarter after a company has done its bank deal. It leaves you wondering what other surprises are in store," she said. It is worth noting the waste management company sold a deal in April shortly before its business fell flat, the distressed analyst quipped.
As for Gundle/SLT Environmental, its bank debt traded in the low 80s last week. Roger Klatt, executive v.p., cfo, treasurer and assistant secretary at GSE in Houston, did not return a call by press time.
The travails are indicative of the broader waste industry's struggles, according to some fixed-income professionals. "It's a sign that our economic recovery isn't strong. The waste industry is a good indicator of economic growth and without demand we're seeing weakness in that sector," Silva explained.
