S&P Upgrades Waste Management (WM) to 'A-'; Outlook Stable
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Standard & Poor's Ratings Services raised its long-term corporate credit rating on Houston-based solid waste services company Waste Management Inc. (NYSE: WM) to 'A-' from 'BBB'. We also raised the rating on all related issue-level ratings on the company's long-term debt by two notches in conjunction with the upgrade. The short-term rating of 'A-2' remains unchanged. At the same time, we removed the ratings from CreditWatch, where we placed them with positive implications on Nov. 26, 2013. The rating outlook is stable.
"We base our upgrade primarily on a reassessment of the competitive position for Waste Management," said Standard & Poor's credit analyst James Siahaan. Our analysis indicates that the company has demonstrated stable profitability over a long period of time, which under the new criteria leads to a more favorable assessment of profitability. However, we do not view the volatility of the company's profitability as being so low as to warrant the use of the low volatility table in determining our ratings. Solid waste services in competitive markets are still subject to cyclical swings, and so we use the standard volatility table in assessing the company's profitability. Recently, the company has taken steps to improve its operating efficiency, having reduced its selling, general, and administrative expenses to 9.6% in the third quarter of 2013—the first instance of reaching this level since the third quarter of 2005. This has resulted in better profitability in recent quarters. We consider the company's business risk profile as "excellent" compared with its previous designation of "strong".
The stable outlook on Waste Management reflects our expectation that the company's strong position in solid waste services will enable it to maintain its operating performance and financial ratios in the two years. It encompasses our view that the company will be able to maintain discipline regarding the pricing of its services as well as its cost structure, and will benefit from steady recovery in the construction and housing markets, along with the broader economy.
We could lower the ratings if an unexpectedly severe downturn in the economy significantly weakens pricing and volumes of waste services, such that revenue contracts by over 5% and EBITDA margins deteriorate to below 22%, resulting in an FFO to debt ratio of less than 20% or debt to EBITDA of greater than 4.0x on a sustained basis. We could also lower the ratings if the company's growth strategy and financial policies become significantly more aggressive than we factor into the current ratings, leading to higher debt and weaker credit measures.
We could raise the ratings on Waste Management if the company shows sustainable improvement in its market position and profitability, together with more prudent investment policies and, as a result, maintains an FFO to debt ratio of greater than 25% or debt to EBITDA of less than 3.0x on a sustained basis. This would imply revenue growth of near 5% combined with EBITDA margins expanding to 27%.
"We base our upgrade primarily on a reassessment of the competitive position for Waste Management," said Standard & Poor's credit analyst James Siahaan. Our analysis indicates that the company has demonstrated stable profitability over a long period of time, which under the new criteria leads to a more favorable assessment of profitability. However, we do not view the volatility of the company's profitability as being so low as to warrant the use of the low volatility table in determining our ratings. Solid waste services in competitive markets are still subject to cyclical swings, and so we use the standard volatility table in assessing the company's profitability. Recently, the company has taken steps to improve its operating efficiency, having reduced its selling, general, and administrative expenses to 9.6% in the third quarter of 2013—the first instance of reaching this level since the third quarter of 2005. This has resulted in better profitability in recent quarters. We consider the company's business risk profile as "excellent" compared with its previous designation of "strong".
The stable outlook on Waste Management reflects our expectation that the company's strong position in solid waste services will enable it to maintain its operating performance and financial ratios in the two years. It encompasses our view that the company will be able to maintain discipline regarding the pricing of its services as well as its cost structure, and will benefit from steady recovery in the construction and housing markets, along with the broader economy.
We could lower the ratings if an unexpectedly severe downturn in the economy significantly weakens pricing and volumes of waste services, such that revenue contracts by over 5% and EBITDA margins deteriorate to below 22%, resulting in an FFO to debt ratio of less than 20% or debt to EBITDA of greater than 4.0x on a sustained basis. We could also lower the ratings if the company's growth strategy and financial policies become significantly more aggressive than we factor into the current ratings, leading to higher debt and weaker credit measures.
We could raise the ratings on Waste Management if the company shows sustainable improvement in its market position and profitability, together with more prudent investment policies and, as a result, maintains an FFO to debt ratio of greater than 25% or debt to EBITDA of less than 3.0x on a sustained basis. This would imply revenue growth of near 5% combined with EBITDA margins expanding to 27%.
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