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Investing.com -- S&P Global Ratings has upgraded the credit rating of GFL Environmental (NYSE:GFL) Inc. from ’BB-’ to ’BB’ following the company’s announcement of a debt repayment plan. The company recently closed a partial sale of its Environmental Services business, generating net proceeds of approximately C$6.2 billion. GFL intends to use up to C$3.75 billion of these proceeds to repay debt.
The credit rating agency expects this debt repayment to reduce the company’s debt to EBITDA ratio to the low-to-mid-4x area over the next couple of years. This is lower than previously anticipated. As a result, S&P also raised the issue-level ratings on GFL’s secured notes to ’BB+’ and the company’s unsecured notes to ’B+’. These ratings remain on CreditWatch with positive implications, indicating an expectation of improved recovery prospects for both secured and unsecured debt following planned repayments.
The stable outlook reflects S&P’s expectation that GFL will maintain its debt to EBITDA ratio in the 4x-5x area while steadily improving margins. The partial sale of GFL’s Environmental Services business to private equity firms Apollo and BC Partners is expected to more than offset lost EBITDA from the sale and contribute to lower leverage. GFL will maintain a 44% stake in the business.
The company plans to use the sale proceeds to immediately repay the amount outstanding under its term loan B and revolver and in subsequent weeks repay the notes maturing in 2025 and 2026. S&P anticipates the recovery prospects for secured and unsecured claims will likely improve and lead to another one notch increase.
The sale of the Environmental Services business is not expected to significantly impact GFL’s competitive position. The company remains the fourth largest waste management company in North America. GFL also intends to retain a 44% equity stake in the Environmental Services business, which could enable it to continue to capture some operational synergies.
S&P’s stable outlook on GFL reflects the expectation that the company will maintain its debt to EBITDA ratio in the low-to-mid 4x area over the next 12 months. This includes the expectation that the company will manage leverage while pursuing M&A and organic growth opportunities, and steadily improving EBITDA margins to the high 20% area.
S&P could lower its ratings on GFL if it expects debt to EBITDA to be sustained above 5x. This could occur if the company pursues a more aggressive financial policy, potentially including large shareholder distributions or spending on acquisitions. Conversely, the ratings could be raised over the next 12 months if the company is able to sustain adjusted debt to EBITDA below 4x and adjusted free operating cash flow to debt above 5%, supported by steady organic growth and profitability.
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