DBRS Confirms BFI Canada at BBB (low), Stable

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 confirmation continues to reflect BFI’s solid earnings profile, its strong market position in Canada, and its generally prudent financial management. The rating also takes into account the overall credit risk profile of the Company’s parent and guarantor, Progressive Waste Solutions Ltd. (PWS), formerly known as IESI-BFC Ltd, which has operations segmented between Canada and the United States.

Following the acquisition of Waste Services, Inc. (WSI) in July 2010, BFI’s earnings profile has remained strong, enjoying stable operating margins. Revenue in the last twelve months ended June 30, 2011, was $738 million, as compared with $603 million for the full year 2010, mainly driven by the inclusion of the WSI operations. Operating margins have remained strong, due not only to strategic tuck-in acquisitions that have improved route densities and internalization rates, but also to the Company’s effectiveness in passing on the bulk of fuel, environmental and other surcharges to its customers. The rating is also supported by the Company’s geographic diversification, which was further expanded with the WSI acquisition. The Company now operates in more than thirty markets in six Canadian provinces. Earnings profile strength is bolstered by BFI’s low vulnerability to economic downturns, its size and position in the Canadian waste-management industry, as well as by the vertical integration that results from the combination of its operation of a waste-collection business and ownership of strategically located landfill sites. BFI’s financial profile also remains commensurate with the current rating category, with strong cash flow from operations and lease-adjusted debt-to-EBITDA within a comfortable range.

That said, the rating on BFI also reflects the overall credit risk profile of PWS, which has traditionally been weaker than that of BFI, largely due to historically lower margins and debt coverage ratios. During the first half of F2011, PWS’s EBITDA margins remained relatively flat when compared with the same period last year. PWS’s lease-adjusted debt-to-EBITDA did improve modestly, although largely as a result of the inclusion of WSI in its earnings rather than a reduction in leverage. The consolidated entity remained acquisitive during the first half of the year and used the majority of its free cash flow for acquisitions and returns to its shareholders.

The main risk to the outlook remains the acquisitive nature of the consolidated entity. PWS is expected to remain acquisitive as part of its core strategy going forward. DBRS believes that financing of potential acquisitions may include debt, thereby weakening the Company’s financial profile. However, DBRS expects the earnings profile of the consolidated group to remain strong over the near to medium term, based not only on solid revenue growth (from both organic growth and continued synergies derived from WSI and other acquisitions), but also on stable operating margins. BFI’s rating has the potential to improve over the medium term if the Company continues to grow profitably and maintains a reasonable level of financial leverage. That said, meaningfully higher financial leverage that stems from debt-financed acquisitions or increased dividend payments or share repurchases could result in pressure on the current rating.

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

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