OREANDA-NEWS. June 16, 2015. Fitch Ratings has assigned a rating of 'BBB' to Waste Connections' proposed \\$500 million issuance of seven- and 10-year senior unsecured notes. The Issuer Default Rating (IDR) for WCN is 'BBB'. The Rating Outlook is Stable.

Proceeds from the proposed notes will be used to term out revolver borrowings and for general corporate purposes. The proposed notes will be issued in the private placement market under a supplement of the company's existing Master Note Purchasing Agreement. The notes will be issued in two tranches: \\$125 million in 3.09% notes due in 2022 and \\$375 million in 3.41% notes due in 2025. The proposed notes will rank pari passu with the \\$600 million of existing notes outstanding under the Master Note Agreement and the obligations under the company's senior unsecured credit facility.

KEY RATING DRIVERS

WCN's ratings are supported by its strong free cash flow, adequate liquidity and moderate leverage, all of which provide the company with significant financial flexibility. The company's strategy of eschewing highly competitive urban markets to focus on maintaining strong competitive positions in smaller, secondary markets has led to consistently strong profitability and cash generation. Consistent with its secondary market focus, WCN derives a notably higher proportion of its revenue from franchise markets compared to its larger competitors, which provides the company with more predictable revenues and profitability tied to these franchise contracts.

Rating concerns include WCN's exposure to the more volatile petroleum exploration and production (E&P) sector and the company's ongoing focus on acquisitions. With its 2012 acquisition of R360 Environmental Solutions, Inc. (R360), WCN significantly increased its exposure to the E&P waste sector. In 2014, 14% of the company's revenue and 21% of its EBITDA was derived from its E&P segment, both significantly higher percentages than most integrated waste companies. The E&P segment is highly sensitive to oil prices and WCN's exposure to the segment will likely result in increased volatility in financial performance going forward.

Fitch expects FCF to remain strong over the intermediate term with FCF expected to stay within the 12% to 14% range. Fitch also expects cash deployment to remain in line with previous expectations, focusing on capital investments, dividends, acquisitions and share repurchases. Leverage should stay within the 2.5x to 3.0x range, although it could temporarily rise above 3.0x to fund an acquisition.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for WCN include:

--U.S. economic conditions continue to improve at a modest pace over the intermediate term, leading to higher volumes and pricing in WCN's traditional collection and landfill business;
--In WCN's E&P business, declining activity in 2015 leads to lower volumes, partially offset by the positive impact of new E&P facilities recently opened, though after 2015 E&P volumes stabilize, growth in the sector remains weak;
--Profitability improves over the intermediate term on higher overall volumes as WCN benefits from operating leverage in its traditional collection and landfill business;
--Capital spending declines somewhat from the relatively high level seen in 2014, but remains consistent as a percentage of revenue with the levels seen several years ago;
--The company continues to make modest to moderately-sized acquisitions over the intermediate term;
--Dividends increase on an annual basis;
--Leverage remains near the year-end 2014 level over the intermediate term;
--WCN maintains an ongoing cash balance in the \\$15 million to \\$25 million range;
--Cash not used for dividends or acquisitions is targeted toward share repurchases.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include
--A significant decrease in the proportion of the company's business tied to E&P waste;
--Reducing leverage (Total Debt/Fitch-calculated EBITDA) to below 2.5x for an extended period;
--A sustained increase in the company's cash liquidity to above \\$50 million.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A change in financial policy that results in leverage increasing above 3.25x for a sustained period;
--A steep decline in the FCF margin to below 3%;
--An adverse environmental development at a landfill that leads to significant liquidity pressure.:

Fitch currently rates WCN as follows:

--IDR 'BBB';
--Unsecured revolving credit facility 'BBB';
--Unsecured term loan 'BBB';
--Senior unsecured notes 'BBB'.

The Rating Outlook is Stable.