Casella Waste Systems' new $300 million credit facility has been assigned a B1 rating by Moody's Investors Service, taking into account the benefits and limitations of the credit's security package. The security includes first-priority perfected liens on all of the assets of Casella and its subsidiaries, except those on motor vehicle titles are not perfected. The lenders, however, will have the option to take security in the company's real estate and landfills. The new credit does not have subsidiary guarantees because Casella and its subsidiaries are the collective borrower. The company's proposed $175 million in senior subordinated notes have been rated B3, reflecting the contractually subordinated nature of the obligations
The credit is weighed down by the Rutland, Vt., company's low consolidated EBIT return on total assets, as well as a weak balance sheet. The return on assets ratio is emphasized because Casella took on debt for the acquisition of KTI in 1999--a move has led to the write-down of goodwill and the sale of the underperforming, non-core assets rather than positive returns. In addition, the company currently suffers from very high leverage, with a ratio of total debt to free cash flow of roughly nine times.
With the continued divestiture of non-core assets, Casella can look forward to improved earnings and cash flow and a stable outlook. Catherine Guinee, analyst at Moody's, noted that the company's MSW assets--its more mature core business segment with a significantly higher return on assets--could be used as a positive indicator of the company's potential improved earnings. But acquisition risk is still a factor as the company has stated that it plans to pursue future acquisitions and, with the unused portion of the revolver, will have the funds it needs. "They still need to be cautious in their acquisition mode," Guinee warned.
Standard & Poor's, meanwhile, has assigned a BB- to Casella's new bank deal and a B rating to its proposed senior sub note offering. The S&P ratings reflect the company's position as a major regional solid-waste services company and its below-average financial profile. In a default scenario, the rating agency estimates that the fully drawn facilities would produce a 50-80% recovery. Calls to the company were not returned by press time.