DBRS Downgrades Newalta Corporation and Changes Trend to Negative

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Newalta Corporation (Newalta or the Company) to BB (low) from BB. DBRS has also revised the Company’s Recovery Rating to RR5 from RR4, based on an anticipated debt recovery of 10% to 30% in a hypothetical default scenario, resulting in a one-notch adjustment to arrive at an Unsecured Notes rating of B (high). The trends have been changed to Negative from Stable.

Newalta’s operating performance has been in decline through 2015, and the deterioration accelerated in Q3 2015, well below DBRS’s expectations. In March 2015, DBRS noted that a negative rating action might occur “if the Company’s financial profile weakens sharply because of persistent deterioration in its operating results.” The decline in oil prices since late 2014 led to a significant reduction in drilling and production activities in the oil patch. Capital expenditures have been curtailed, delayed or cancelled, maintenance spending has decreased, and well shutdowns have increased, reducing production-related waste volumes. Furthermore, some Newalta customers have elected to lower costs by managing more waste internally, thus reducing the availability of higher quality waste on the market and ratcheting up the competition to treat and dispose of it.

Although the proceeds from the sale of the Industrial business in Q1 2015 helped moderate the weakening in all debt coverage ratios, poor operating performance through Q3 2015 led to substantially weaker credit metrics, and the Company has guided that performance in Q4 2015 will be weaker on a sequential basis. Annualizing the nine-month 2015 figures and adjusting for operating leases, DBRS calculates F2015 (estimated) Adjusted Debt-to-EBITDA to be 4.8x and adjusted Cash Flow-to-Debt at 10%. These metrics are well below the range associated with the Issuer Rating prior to today’s downgrade. Newalta received a waiver for its credit facility covenant requiring Total Debt-to-EBITDA to remain below 4.5x, providing additional flexibility as the Company navigates the current challenging operating environment. The waiver will remain in effect through June 2017.

The Negative trend reflects that the key metrics are at the low end of the range for the new Issuer Rating level, meaning there is little cushion to absorb further weakening in the financial risk profile. DBRS acknowledges that operating earnings should benefit from aggressive cost reduction efforts and returns on growth project investments, and that cash outlays should decrease dramatically because of lower capital spending and a 50% cut in the dividend as the Company strives to achieve free cash flow neutrality in 2016. However, DBRS may take another negative rating action if disappointing operating performance continues to weaken the Company’s key credit metrics.

Notes:
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 Criteria: DBRS Recovery Ratings for Non-Investment Grade Corporate Issues, which can be found on our website under Methodologies.