Covanta Holding Corp. Downgraded To 'B+', Outlook Stable; Debt Ratings Lowered

  • Recent financial performance at U.S.-based Energy from Waste (EfW) provider Covanta Holding Corp. has fallen short of our expectations. We forecast our measure of adjusted leverage will remain above 6.5x through 2021 as the company faces headwinds in multiple operating segments while it continues to fund construction of its U.K. expansion.
  • We are lowering our issuer credit rating on the company to 'B+' from 'BB-'. We are also lowering our rating on the company's senior unsecured debt to 'B+' from 'BB-' and our rating on the company's deeply subordinated debt to 'B-' from 'B'.
  • The stable outlook reflects the contracted and hedged nature of most of Covanta's cash flows, which provides good cash flow visibility, as well as our belief that adjusted leverage will top out at around 7x in 2020 before declining in 2021.
NEW YORK (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above.
The company's leverage will remain above 6.5x through 2021.  We measured Covanta's year-end 2019 adjusted debt to EBITDA at 6.5x and expect leverage to remain at or slightly above this level through 2021. The company is facing a number of market headwinds that weigh on profitability in the near term, namely depressed power and metals commodity prices. The company also continues to integrate recently acquired facilities into its operations base, which can lead to temporary increases in plant operating expense. Further, the company is completing its build out of its U.K. expansion plans, with three projects under construction and one in advanced development. The company receives development fees that help cover the cost of equity contributions; however we expect material cash outflows in 2022 and 2023. All of these factors weigh on cash flows and have contributed to an increase in leverage relative to our previous expectations.
The stable outlook on Covanta reflects our view that leverage will top out at about 7x in 2020, before declining to the mid- to- high- 6x area in 2021. While plant operations and revenue from waste processing could be constrained in 2020 due to ongoing global efforts to contain the novel coronavirus than we currently forecast, we believe the highly contracted nature of Covanta's cash flows--through both waste service contracts and energy hedges --limit the company's downside in 2020.
Factors that could lead to a rating downgrade would likely involve poor operational performance, including boiler availability of less than 90% or further declines in metals and power prices such that adjusted debt to EBITDA is above 7.0x or FFO to debt is below 9% on a sustained basis. We could also consider a downgrade if financial policy, which has become more favorable in our opinion, reverts and becomes more aggressive with capital allocations that are disadvantageous to creditors.
We could consider an upgrade if operating results continue to be solid, performance recontracting in energy from waste assets remains strong, and financial performance improves such that we had confidence adjusted debt to EBITDA and FFO to debt would remain below 6x and above 12% on a sustained basis.
Note: While we previously rated Covanta's senior secured debt, these ratings were withdrawn at the issuer's request.
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