DBRS Confirms GFL Environmental Inc.’s Issuer Rating and Downgrades Senior Unsecured Notes Rating

DBRS Limited (DBRS) has today confirmed the Issuer Rating of GFL Environmental Inc. (GFL or the Company) at B. The trend remains Stable. Additionally, DBRS has downgraded the recovery rating of the Senior Unsecured Notes to RR5 and downgraded the associated instrument rating to B (low) to align the instrument rating with the RR5 recovery rating. The downgrade reflects a lower recovery caused by increased leverage, including an increase in the size of the Company’s senior secured revolving credit facility.

GFL previously announced that it closed an issuance of USD 200 million of senior unsecured debt, in addition to the USD 300 million of senior unsecured debt that was issued in February 2016, and that it used the net proceeds to repay all outstanding borrowings under its existing senior secured revolving credit facility. DBRS anticipates that the remaining cash from the issuance will be used to fund growth investments, including acquisitions, such as the recently announced acquisition of Detox Environmental Ltd.

The Company has been in rapid growth mode over the last few years, mostly through debt-financed acquisitions. Additionally, GFL has been successful in retaining and winning new municipal contracts; however, the investments needed to support the new contracts have added to the Company’s debt load. GFL has a highly leveraged balance sheet. Nevertheless, the Company has previously maintained its leverage as measured by adjusted debt-to-run rate EBITDA ratio (as defined by DBRS) of 5.0 times (x) to 5.5x through 2015. On a pro forma basis, the Company’s current adjusted debt-to-run rate EBITDA ratio is 5.7x and, although aggressive, the leverage is acceptable for the B rating.

The Company’s reported operating results in 2015 were in line with DBRS’s expectations, with reasonable revenue growth and improved margins; however, the increase in interest expense associated with the new debt will reduce the margin for error, increasing the financial risk going forward. DBRS also notes that the Company’s $1.041 billion in acquisitions that closed in Q1 F2016 have also affected its business risk profile. The Company has further solidified its market position in Ontario and entered the Québec marketplace as well as continued to grow its soil treatment business. The pace of GFL’s acquisition activities and the size of recent acquisitions have increased integration risk, despite the Company’s good track record.

DBRS expects the current ratings to remain stable over the short term; however, should GFL continue to fund growth through the issuance of new debt or EBITDA in newly acquired companies be below expectations, this may lead to negative rating actions. Increasing contributions from recent acquisitions and contract wins should support strong revenue growth. DBRS expects operating profit to grow faster than revenue because of strong margins in the acquired companies and benefits from continued restructuring. DBRS also expects the Company to generate modest free cash flow with positive overall cash generation as a result of the increase in equity and debt financing. Capital expenditures are expected to increase in line with earnings, but DBRS anticipates that acquisitions will slow for the remainder of the year.

Pursuant to its rating criteria on recovery ratings for non-investment grade corporate issuers, DBRS has created a default scenario for GFL 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. DBRS has determined GFL’s estimated value at default by using an EBITDA multiple valuation approach, using a 4.0x multiple of normalized EBITDA. Based on the default scenario, the Senior Unsecured Notes would have a recovery estimated between 10% and 30%, which aligns with a recovery rating of RR5; therefore, the instrument rating of the Senior Unsecured Notes is B (low), one notch lower than 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.

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.