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 and its Issuer Rating at BBB (low) with a Stable trend. The confirmation of the ratings reflects BFI’s stable operating performance despite a challenging economic environment. The ratings continue to reflect BFI’s strong market position in Canada, and the Company’s generally prudent financial management. The ratings also take into consideration the highly competitive nature of the industry as well as the overall credit risk profile of the Company’s parent and guarantor, Progressive Waste Solutions Ltd. (PWS), which has operations segmented between Canada and the United States.

BFI’s revenues increased to approximately $764 million in the last twelve months (LTM) ended Q2 F2012 versus $749 million for the full-year 2011, driven largely by positive pricing improvements, volume growth, and tuck-in acquisitions completed in the first half of F2012. EBITDA margins declined modestly to 32% during the LTM ended Q2 F2012 (vs. 32.6% in F2011), mostly attributable to higher fuel costs (normally passed through as fuel surcharge) and lower recycled commodity pricing. As such, EBITDA for the LTM ended Q2 F2012 remained relatively flat when compared to F2011.

In terms of financial profile, BFI continues to generate stable operating cash flow, which remains more than sufficient to cover the Company’s capex requirements. Generally, the majority of BFI’s positive free cash flow, along with external financing when required, is used toward small tuck-in acquisitions and to satisfy its parent’s dividend and share repurchase commitments. In the LTM ended Q2 F2012, BFI’s balance sheet debt increased modestly to fund some tuck-in acquisitions, which resulted in a moderate deterioration in BFI’s key credit metric; that is, debt-to-EBITDA (excluding letters of credit) at 1.86 times (x) in the LTM ended Q2 F2012 versus 1.67x at F2011.

The ratings on BFI also reflect the overall credit risk profile of PWS, which has traditionally been weaker than that of BFI, largely due to historically lower margins and higher leverage. In the LTM ended Q2 F2012, PWS’s EBITDA margins declined to 27.8% from 28.7% at the end of F2011, largely due to less favourable commodity pricing, higher fuel surcharges, and generally weak economic conditions in the U.S. North East segment. PWS also continued to use the majority of its free cash flow toward tuck-in acquisitions and returns to shareholders, resulting in a slight increase in balance sheet debt to US$1.37 billion at Q2 F2012 versus US$1.31 billion at the end of F2011.

DBRS expects the earnings profile of the consolidated entity to remain relatively stable over the near to medium term, based on steady revenue growth in the form of both organic growth as well as through acquisitions. EBITDA margins are expected to be slightly pressured in the near term as commodity pricing may remain unfavourable and fuel surcharges remain high, resulting in relatively flat organic EBITDA growth. The main risk to the outlook continues to be the acquisitive nature of the combined entity, the funding of which may result in additional balance sheet debt. DBRS notes that meaningfully higher financial leverage that stems from these debt-financed acquisitions and/or increased returns to shareholders in the form of dividends or share repurchases may result in pressure on the current rating.

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