DBRS Confirms GFL Environmental Inc. at B, Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of GFL Environmental Inc. (GFL or the Company) at B with a Stable trend. The confirmation reflects that the Company has executed its announced financing transactions, and that GFL’s risk profile is compatible with the current rating. However, the Company remains acquisitive, and more debt-financed acquisitions would put the current rating at risk.

The Company has raised USD 250 million of senior unsecured notes and used part of the proceeds to repay a $20 million unsecured term loan, the borrowings from the secured credit facility and redeem CAD 53 million of its outstanding 7.50% Senior Unsecured Notes (Notes) due 2018. DBRS anticipates that the remaining cash from the new issuance will likely be used to fund growth investments, including acquisitions. The sharp increase in gross debt and associated interest expense from the debt issuance has led to GFL’s rating being downgraded from B (high) to B (see March 4, 2015, press release for details). Additionally, GFL has amended and restated its existing senior secured revolving credit facility and extended the maturity to March 2019. The longer maturity and full availability of the credit facility adds to its liquidity position and financial flexibility.

DBRS notes that GFL’s business risk profile is stable and supports the current rating. GFL has a strong growth profile, and increasing contributions from recent acquisitions and contract wins should support ongoing revenue growth. GFL continues to have a meaningful portion of its revenue from municipal contracts, which tend to be longer-term in nature and less price-sensitive. A growing industrial and commercial business also strengthens its business and geographical diversification.

Near term, DBRS expects contributions from acquisitions and benefits from restructuring initiatives to boost operating profit and free cash flow to be modestly positive, despite an expected rebound in capital expenditures to support new contract wins. Furthermore, DBRS anticipates acquisitions to be at a comparable pace, as in 2014, and the recently completed financing transaction to provide sufficient liquidity to meet funding needs. The current rating has taken into consideration using the full credit facility to fund acquisitions, but a further meaningful increase in debt would put the current rating at risk.

Pursuant to our rating criteria on recovery ratings for non-investment grade corporate issuers, DBRS has created a default scenario for GFL in order to analyze when and under what circumstances a default could hypothetically occur and the potential recovery of the Company’s debt in the event of such default. Based on the default scenario, the Notes would have recovery estimated between 30% and 60%, which aligns with a recovery rating of RR4. Therefore, the instrument rating of the Notes is B, the same as the Issuer Rating.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Services Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.