DBRS Confirms BFI Canada at BBB (low)

DBRS has today confirmed the rating on BFI Canada Inc.’s (BFI or the Company) Senior Secured Debenture at BBB (low) with a Stable trend. The rating mainly reflects BFI’s strong market position in Canada, modest financial volatility through the most recent economic cycle, and vertical integration of its non-hazardous solid waste collection, recycling and disposal services business. The rating also takes into account the financial and business risk profile of the Company’s parent and guarantor, IESI-BFC Ltd. (IESI-BFC), which has operations segmented between Canada (through BFI) and the United States (through IESI Corporation (IESI)). IESI’s financial profile is weaker than that of BFI, mainly due to historically lower margins and debt coverage ratios.

DBRS confirmed the Company’s rating on July 2, 2010, upon the closing of the acquisition of Waste Services, Inc. (WSI) by IESI-BFC, and both BFI and IESI-BFC generated solid operating performance through the 12 months to September 30, 2010. DBRS expects the acquisition of WSI will improve the business risk profile of both entities, mainly from the increase in scale and market penetration (particularly in Canada). Higher levels of collection density should lead to cost savings, reduced capital requirements, and improved returns on capital. WSI’s Canadian operations have been amalgamated into BFI, and will increase the Company’s share of revenues from commercial and residential non-hazardous waste markets, which are less cyclical than its industrial business.

The financial profiles of BFI and IESI-BFC weakened from the WSI acquisition, due to the increase in bank debt (used to redeem WSI indebtedness of roughly $400 million). However, the increase is manageable for BFI’s rating and partly offset by WSI earnings and cash flow. Importantly, the near-term outlook has improved since the acquisition was announced in late 2009. Volumes have been stronger than expected, price appreciation has continued and the economic environment has modestly improved over the nine months to September 30, 2010. As such, organic sales and earnings growth will complement the inclusion of WSI operating results over the near term.

The main risk to the outlook remains the acquisitive nature of IESI-BFC. The integration of WSI is likely to be the main focus of IESI-BFC in the short term but future investments are expected, particularly given the highly fragmented nature of the industry. DBRS believes that acquisitions would likely include debt in the financing mix, but IESI-BFC has also issued equity in the past to limit balance sheet pressure and this should continue to be the case. BFI’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 its landfill concern in Calgary. That said, meaningfully higher financial leverage stemming from future material debt-financed acquisitions or increased dividend payments could result in ratings pressure.

Note:
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.