DBRS Confirms BFI Canada at BBB (low), Removes Rating from Under Review-Developing

DBRS has today confirmed the rating on BFI Canada Inc.’s (BFI Canada or the Company) Senior Secured Debenture at BBB (low) with a Stable trend, and removed it from Under Review with Developing Implications, where it was placed on August 19, 2008.

The review was initiated following the announcement by BFI Canada Income Fund (the Fund) that its board of trustees had approved the conversion of the Fund to a corporation. At that time, DBRS stated that it would resolve the Under Review with Developing Implications status once the resulting corporate structure (including capitalization), business plans and financial strategies of the respective entities were determined and assessed.

On October 1, 2008, BFI Canada Income Fund (an income trust) successfully converted to BFI Canada Ltd. (a corporation), and BFI Canada Holdings Inc. was amalgamated into BFI Canada Inc. BFI Canada Ltd. subsequently changed its name to IESI-BFC Ltd. (June 1, 2009). As such, DBRS’s rating now applies to the debt at BFI Canada Inc., an indirect subsidiary of IESI-BFC Ltd. (IESI-BFC).

The rating confirmation reflects BFI Canada’s solid earnings profile, based on a strong record of revenue growth (evenly derived from commercial, residential and industrial customers) and improving operating margins. Over the past few years, BFI Canada has achieved double-digit revenue increases (16.2% in 2008), driven mainly by organic growth (9.7% in 2008). Operating margins have remained strong due to strategic tuck-in acquisitions that improve route densities and internalization rates. As well, BFI Canada remains effective at passing on the bulk of fuel, environmental and other surcharges to its customers. The rating is further supported by the Company’s geographic diversification – it operates in 20 markets in five provinces – and its solid financial profile. Earnings profile strength is bolstered by BFI Canada’s low vulnerability to economic downturns, its size and number-two position in the Canadian waste-management industry, and the vertical integration resulting from its operation of a waste-collection business and ownership of strategically located landfill sites.

That said, the rating on BFI Canada also reflects the overall credit risk profile of IESI-BFC. The financial profile of the consolidated entity has improved since its conversion to a corporation. IESI-BFC raised over US$200 million in equity capital in the first half of 2009, which it has used for debt reduction in its U.S. operations. This factor, combined with reduced dividends as a corporation, has resulted in meaningfully lower financial leverage and enhanced financial flexibility. DBRS expects IESI-BFC to maintain its recently achieved level of financial leverage as the consolidated entity should run in free cash flow positive territory going forward.

The main risk to the outlook remains the consolidated entity’s acquisitive nature. IESI-BFC is expected to remain acquisitive as the industry remains highly fragmented. DBRS believes that any acquisitions are likely to include debt in the financing mix. DBRS expects the earnings profile of the consolidated group to remain strong over the near-to-medium term, based on solid revenue growth and stable operating margins. BFI Canada’s rating has the potential to improve over the medium term if the Company continues to grow profitably, maintains a reasonable level of financial leverage, and resolves the Calgary landfill concern. That said, meaningfully higher financial leverage stemming from debt-financed acquisitions or increased dividend payments could result in ratings pressure.

Notes:
The applicable methodology is Rating Consumer Products, which can be found on our website under Methodologies.

This is a Corporate rating.