DBRS Places BFI Canada Under Review with Developing Implications

DBRS has today placed BFI Canada Inc.’s (BFI Canada or the Company) BBB (low) Senior Secured Debenture rating Under Review with Developing Implications.

The rating action follows IESI-BFC Ltd.’s (IESI-BFC) announcement that its board of directors has approved a definitive merger agreement with Waste Services, Inc. (WSI). Under the terms of the agreement, IESI-BFC will issue 27.8 million common shares to WSI shareholders (approximate value of US$370 million), and assume WSI’s outstanding debt. With regard to the assumed debt and transaction costs, IESI-BFC plans to utilize a portion of its available U.S. credit capacity, and increase the size of its Canadian revolving credit facility from $305 million to approximately $450 million. Management stated the consolidated company should have pro forma debt-to-EBITDA of approximately 2.70x immediately following the close of the transaction. They also said the combined company would use its excess free cash flow to reduce its indebtedness such that debt-to-EBITDA is reduced to below 2.50x for the consolidated company within a reasonable time frame.

The merged entity would be North America's third-largest solid waste management company with expected pro forma annual revenues of nearly US$1.5 billion, and Management expects the transaction to generate US$25 million to US$30 million in net pre-tax annual run rate synergies by the end of the second year. The transaction is subject to various closing conditions, including satisfactory completion of due diligence; both companies receiving fairness opinions; WSI shareholder approval; and approvals by antitrust and other regulatory authorities. The companies will have 30 days from today to complete due diligence and obtain fairness opinions, and anticipate that the transaction will close in the first calendar quarter of 2010.

On October 15, 2009, DBRS confirmed the rating on BFI Canada’s Senior Secured Debenture at BBB (low) with a Stable trend. That confirmation continued to reflect BFI Canada’s strong record of revenue growth and improving operating margins. The rating is further supported by the Company’s geographic diversification, 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 which has improved considerably since its conversion to a corporation. IESI-BFC raised over US$200 million in equity capital in the first half of 2009, which it used for debt reduction in its U.S. operations. This factor, combined with reduced dividends as a corporation, resulted in meaningfully lower financial leverage and enhanced financial flexibility for the consolidated entity.

DBRS expects IESI-BFC to remain in strong free cash flow positive territory going forward.
However, DBRS will focus on the final form of the proposed merger (i.e., the level of debt within each of the Canadian and U.S. entities), management’s intentions with regards to future acquisitions and debt reduction in its review.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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

This is a Corporate rating.