OREANDA-NEWS. S&P Global Ratings today said it affirmed its 'B' long-term corporate credit rating on Toronto-based waste services company GFL Environmental Inc. The outlook is stable.

At the same time, S&P Global Ratings assigned its 'BB-' issue-level rating and '1' recovery rating to the company's proposed C$610 secured term loan (U. S.- and Canadian-dollar equivalent) due 2023. A '1' recovery rating indicates very high (90%-100%, higher end of range) recovery in a default scenario.

The company will use the proceeds from the term loan and common equity to fund the proposed acquisitions (about C$550 million) in pipeline, as well as redeem C$247 million of 7.5% senior unsecured notes outstanding.

"The affirmation on GFL follows the company's announcement that it has entered into an agreement to purchase a U. S. acquisition and is planning to redeem its 7.5% unsecured notes due 2018," said S&P Global Ratings analyst Aniki Saha-Yannopoulos.

Finally, S&P Global Ratings is lowering its issue-level rating on GFL's unsecured notes to 'B-' from 'B' and revising its recovery rating on the notes to '5' from '4'. A '5' recovery rating indicates modest (10%-30%, lower end of the range) recovery in a default scenario.

GFL is a regional waste services company that has been conducting business exclusively in Canada; with the new U. S. acquisitions, GFL will expand into the Midwest U. S. The impact the acquisition (estimated to account for about 10% of pro forma revenues) will have on GFL's operating breadth is not sufficient to change our business risk assessment. In addition, the refinancing plan is expected to have a modest impact on the company's prospective credit measures. The ratings on GFL reflect S&P Global Ratings' view of the company's fair business risk profile and highly leveraged financial risk profile.

We expect GFL to remain highly acquisitive, and have assumed that it will fund these purchases primarily with debt, which will account for the bulk of the company's growth. Post-acquisition, GFL will operate in almost all provinces in Canada, with about 10% of revenues generated from the U. S. The stability of long-term solid waste collection contracts GFL has with several Canadian municipalities partially offset these factors.

The stable outlook reflects our expectation that GFL will continue to expand its operating breadth through acquisitions while maintaining a highly leveraged financial risk profile. We estimate the company will generate adjusted debt-to-pro forma EBITDA of about 5.5x-6.5x, and we place greater emphasis on pro forma ratios due to the company's highly acquisitive growth strategy, which is funded mostly by debt.

We would consider a negative rating action if adjusted debt-to-pro forma EBITDA approaches 7x, which we believe could result from highly leveraged acquisitions, competitive pressures, or operating inefficiencies that contribute to weaker-than-expected earnings and cash flow. We also believe there is additional integration risk associated with the larger acquisitions compared with smaller tuck-ins the company has previously done and would have a larger effect on credit measures if the acquisitions underperform. Furthermore, we could lower the rating should GFL become liquidity-constrained, where headroom under its funded debt-to-EBITDA covenant fell below 15%. This could limit the company's availability under its revolving facility and lead to a downgrade.

Although we believe it is highly unlikely in the next 12 months, we could upgrade GFL should its credit metrics strengthen and we believe the company is committed to maintaining an adjusted debt-to-pro forma EBITDA ratio in the mid-to-low 4x area with adequate liquidity.