OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating for Synagro-Baltimore LLC's (Synagro) $25.6 million ($2.2 million outstanding) tax-exempt series 2008 A revenue refunding bonds, which were issued on behalf of Synagro by the Maryland Industrial Development Financing Authority. The Rating Outlook is Stable.

The rating reflects Synagro's strong financial performance anchored by the steady receipt of fixed contractual revenues and a history of stable operations. Synagro's debt service coverage ratio (DSCR) exceeds 1.6x in a Fitch rating case that incorporates higher expenses and reduced operational performance.

KEY RATING DRIVERS

Revenue Risk - Midrange
Stable Revenue Profile: Synagro's cash flows are primarily derived from a fixed price service agreement with an unrated fund owned by the city of Baltimore. Synagro is not exposed to volumetric or price risks, as the agreement is structured as a put-or-pay contract with guaranteed minimum payments. The agreement provides substantial flexibility if a facility experiences an outage, and tipping fees are only reduced in extreme circumstances. Any payment shortfalls are mitigated by a debt service reserve exceeding the outstanding balance of the debt.

Cost Risk - Midrange
Low Operational Risk: The Synagro facilities incorporate highly redundant systems with relatively simple and proven technology, which have been in service almost continuously since the beginning of commercial operations and have accumulated extensive operating histories. The high proportion of reimbursable expenses under the service agreement limits the potential for higher O&M costs to impact cash flows, though management service fees may be charged to the project at the sponsor's discretion. Fitch does not anticipate that Synagro will incur non-routine maintenance costs prior to the maturity of the bonds, and the project is not required to make specific capital improvements under the service agreements.

Debt Structure - Midrange
Standard Debt Structure: The senior secured, fixed-rate bonds fully amortize throughout the debt's tenor, reaching maturity in Dec. 2016. Bond holders benefit from a letter of credit funded debt service reserve of approximately $2.6 million. Fitch expects DSCRs to remain level through the maturity of the debt.

Consistent Financial Performance: Synagro has historically maintained a stable cost profile that has combined with fixed contractual revenues to provide level operating margins. The projected level of financial performance is consistent with the current rating across Fitch's stress scenarios, including an extended outage at one of the facilities. The final year DSCR is forecasted at 1.63x in a Fitch rating case that contemplates both higher expenses and reduced availability.

Peers: An appropriate peer within Fitch's portfolio is the Philadelphia Project Finance Inc. (PA) (Synagro-Philadelphia, 'BBB'/Stable Outlook) sludge processing facility. Overall, performance is relatively similar with Fitch rating case coverage ratios of approximately 1.6x - 1.7x. However, Synagro-Philadelphia's leverage is significantly elevated in relation to the Baltimore facility, as its debt matures in 2032.

RATING SENSITIVITIES

Negative - Final Payment: There is a low likelihood of a negative rating action as the bonds are additionally secured by the debt service reserve fund, which is sufficient to fully satisfy the final debt payments.

CREDIT UPDATE

Synagro is a special purpose company created to own and operate two sludge processing facilities that provide disposal services to the city of Baltimore. Synagro must process and/or dispose of all sludge delivered to the facility by the city. Synagro's Patapsco facility operates under a service agreement, expiring in 2017, under which Baltimore has a contractual obligation to deliver a guaranteed minimum tonnage or pay service fees on the equivalent sludge volume. Synagro's Back River facility operates under a similar agreement that was recently renewed for a 10-year period in April, 2015. Per the new agreement, the Back River facility no longer receives tipping base fees as part of its revenue. However, Fitch expects service tipping fees from the Back River facility coupled with total revenue from the Patapsco facility to provide cash flow cushion well after the debt matures at the end of 2016.

Synagro continued its strong operating and financial performance in 2014, achieving a DSCR of 1.83x. Revenues remain based upon minimum contractual volumes, and neither facility has recently encountered any operational difficulties. O&M costs are relatively stable and Synagro has not incurred any unusual expenses. Through Q3 2015, the project achieved a DSCR of 1.97x. Synagro is expected to maintain strong coverage as debt service decreased in 2015 and will remain around the $2 million level through maturity in 2016. The project is additionally secured by a $2.6 million debt service reserve fund which is sufficient to fully cover the remaining scheduled debt service.

Application of the Rating Criteria for Availability Based Projects' break-even and ROC analysis, together with rating case coverage metrics, support the current rating. Fitch's rating case contemplates debt service coverage under stressed conditions aimed to capture increases in O&M costs, as well as a reduction to plant availability. Debt service coverage in 2016 is forecasted at 1.63x in Fitch's rating case. Coverage was bolstered in 2015 and is expected to remain strong in 2016 due to a decline in debt service as the bonds near maturity. The project's total cost break-even was 41%, indicating a breakeven ROC multiple of 4.1x and demonstrating the project's cushion against cost increases.