GFL Environmental Inc.'s Proposed US$500 Million Senior Unsecured Notes Due 2027 Rated 'CCC+' (Recovery Rating: '6')

TORONTO (S&P Global Ratings) April 17, 2019--S&P Global Ratings today said it assigned its 'CCC+' issue-level rating and '6' recovery rating to GFL Environmental Inc.'s proposed US$500 million senior unsecured notes due 2027. The '6' recovery rating indicates our expectation that unsecured lenders would receive negligible (0%-10%; rounded estimate 0%) recovery in the event of default.
We assume GFL will use net proceeds primarily to fund acquisitions and repay amounts drawn under its revolving credit facility. This is consistent with our view that GFL will continue to expand its operating breadth through acquisitions that we expect will be primarily debt-funded. We forecast adjusted debt-to-pro forma EBITDA to be 7x-8x and adjusted funds from operations (FFO) cash interest coverage to be in the low-2x area over the next couple of years. These forecast credit measures are commensurate with our issuer credit rating on GFL, albeit at the weaker end. We could lower our ratings on the company within the next 12 months if adjusted FFO cash interest coverage falls below 2x. In our view, this could result from poor execution of integrating acquisitions, volume and pricing pressure from tough market conditions, or operating inefficiencies that contribute to weaker-than-expected earnings and cash flow.
Our 'B' issuer credit rating and stable outlook on GFL reflect the company's position as the fourth-largest solid waste management company in North America, with operations across Canada and 20 U.S. states. We believe the company benefits from high revenue visibility due to its multiyear service contracts and high renewal rates across a diversified customer base. The rating also reflects our view that the solid waste management market is mature and highly fragmented, with incumbents intent on gaining market share through a competitive bidding process, particularly for large solid waste contracts. Therefore, we assume organic revenue growth will generally be in the low-single-digit area. Furthermore, we believe there is a relatively high degree of integration risk that could contribute to earnings volatility, particularly in the near term, because GFL closed its US$2.825 billion merger with Waste Industries on Nov. 14, 2018, and continues to pursue tuck-in acquisitions.
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