Canadian Waste Co. Levers-Up For U.S. Transition

Waste Services, a subsidiary of Ontario-based Capital Environmental Resource, is significantly increasing its leverage with a new $160 million credit facility and $160 million of junk bonds. The debt will back the purchase of U.S. municipal solid waste assets and refinance $172 million of loans. The company is entering the U.S. market by acquiring landfills and then internalizing waste, a process that drives profitability, said Paul Blake, a Standard & Poor's analyst.

Waste Services has recently acquired Florida Recycling Services for $107.75 million in cash and common stock. "We are migrating to the U.S. because the majority of our assets are located in the U.S. and [we] wanted to have more access to the capital markets," said Mark Pytosh, executive v.p. of investor relations at Waste Services.

S&P has assigned the bank debt a B+ rating and a recovery rating of 3, implying a 50-80% chance of recovery in the event of default. Moody's Investors Service has given a B1 rating to the loan. Blake said the ratings reflect the company's "acquisitive growth strategy and aggressive financial profile." The bank debt consists of a five-year $60 million revolver, split between a $45 million U.S. tranche and a $15 million Canadian tranche. There is also a seven-year, $100 million term loan that has a provision for an additional $50 million term facility for acquisitions. Lehman Brothers is leading the bank debt. After the transaction is completed, Waste Services will have total debt-to-EBITDA of over six times.

In Blake's view, challenges include the successful integration of the newly acquired assets into existing operations, increased leverage and the turnaround of some of their underperforming assets. But according to Blake, a default is highly unlikely. The company expects to see benefits in late 2004 as the new landfills begin operation.