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Investing.com -- Moody’s Ratings has confirmed the ratings of Enviri Corporation, formerly known as Harsco (NYSE:NVRI) Corporation, including the B1 corporate family rating (CFR) and B1-PD probability of default rating. The ratings agency also upheld the Ba3 rating on the company’s existing senior secured bank credit facility, which consists of revolving credit facilities set to expire in 2026 and 2029, and a term loan due in 2028. In addition, Moody’s affirmed the B3 rating on the senior unsecured notes. However, the outlook for Enviri was altered from stable to negative, while the SGL-3 speculative grade liquidity rating remained unchanged.
The negative outlook is due to ongoing execution risks, primarily in Enviri’s rail business. These risks are attributed to difficulties in fulfilling key European rail contracts, leading to increased costs and weak free cash flow. Enviri is currently in talks with its customers to mitigate the risk of losses, which have been accounted for in forward loss provisions due to supply chain issues and elevated manufacturing costs. The timeline to address these challenges in the rail business is yet to be determined. If these issues persist, they could lead to poor operating results and extend Enviri’s negative free flow. The company is also experiencing pressure in its steel production markets due to ongoing macroeconomic challenges.
The B1 CFR affirmation is based on Enviri’s substantial services under contract and a significant order backlog that provides revenue predictability. This is supported by longstanding customer relationships. The company’s position in its Clean Earth and Harsco Environmental business segments is also favorable, both of which have high barriers to entry and diverse by region, end market, and customer. Despite operating in a competitive landscape for its environmental services, demand is partially driven by customers’ need to comply with environmental waste regulations. The backlog and demand fundamentals at Clean Earth will help compensate for lower revenue at Harsco Environmental through 2025.
Enviri’s high leverage and cyclical exposure in Harsco Environmental are also reflected in the rating. Sales in this segment are linked to steel production volumes and are sensitive to extended slowdowns in steel mill production or excess production capacity. Steel production remains low in most regions globally, including Europe, due to weak economic growth, cheaper Asian alternatives, and escalating geopolitical tensions and the threat of tariffs. However, higher volumes in rapidly growing areas like India and the Middle East provide some balance.
Moody’s expects Enviri to maintain sufficient liquidity over the next year, supported by a cash balance of over $100 million and expected ample revolver availability. Negative free cash flow is predicted to continue in the short term before turning positive in 2026, aided by earnings growth, reduced pension contributions, and some rail milestone payments over the next 12-18 months. Enviri’s amendment in February 2025 to relax covenants will moderately increase the headroom.
The ratings could be upgraded with consistent top line growth and significantly stronger metrics. For a ratings upgrade, Moody’s would expect to see adjusted debt-to-EBITDA sustained below 4x, adjusted EBIT to interest expense above 2x and EBIT margin improving and sustained above 6.5%. Good liquidity, including consistent positive free cash flow along with ample revolver availability and covenant headroom, would also be required for an upgrade.
The ratings could be downgraded if debt-to-EBITDA remains above 5x, margins decline due to execution challenges or weakening business fundamentals, or EBIT to interest is sustained below 1x. Any deterioration in liquidity, including weaker than expected free cash flow or declining headroom in complying with covenants, could also result in a ratings downgrade. A meaningful increase in expected losses related to continued delays on delivering under key European rail contracts or the company’s inability to execute on its plan related to these contracts would also drive a ratings downgrade. Evidence of a more aggressive posture on capital allocation, including debt funded acquisitions or dividends that weaken the metrics could also drive a ratings downgrade.
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