Waste Management Inc. (WM) announced the pricing of an underwritten public offering of its $600 million of 4.75% senior notes due June 30, 2020.
The offering is expected to close on June 8, 2010. Interest will be payable on the notes semiannually. The notes will be fully and unconditionally guaranteed by Waste Management’s wholly owned subsidiary, Waste Management Holdings Inc. Standard & Poor’s and Fitch have assigned BBB rating to the notes.
The net proceeds, together with Waste Management’s existing cash, will be expended for repayment of $600 million of 7.375% senior notes that mature in August 2010.
Waste Management had last issued $600 million of 6.125% senior notes in November 2009. The funds were utilized in various acquisitions, including the company’s purchase of a 40% stake in Shanghai Environment Group, a company focused on developing waste-to-energy plants in China. However, Waste Management’s interest burden increased by approximately $65 million due to the issuance.
As of March 31, 2010, Waste Management’s total debt was approximately $8.8 billion. This included $5.5 billion of senior notes and debentures, maturing through 2039 with interest rates ranging from 5.0% to 7.75%. Waste Management’s debt-to-capitalization as of March 31, 2010 was 57.4%, on the higher side compared to its competitors Republic Services Inc.’s (RSG) 48.5% and Stericycle Inc.’s (SRCL) 53.0%.
The addition of the new notes will temporarily increase Waste Management’s leverage slightly until the August 2010 notes are repaid. After the repayment of the $600 million of 7.375% senior notes, Waste Management’s debt position will remain the same compared to current levels given that it is again incurring debt to repay the notes.
The company’s interest burden will consequently increase as it is taking up more debt to repay debt, and will thus have a more detrimental effect on its margins. This is a concerning factor considering that Waste Management’s net margin in the first quarter of 2010 was 6.8%, less than Republic Services Inc.’s 9.6% and Stericycle Inc.’s 14.7%.
Although Waste Management carries a rather hefty debt load, we are not that alarmed considering the company’s cash position and steady cash flow. Waste Management has exhibited continued financial flexibility and free cash flow generation potential despite the recession-driven decline in collection and disposal volumes.
Waste Management’s liquidity as of March 31, 2010 remained strong, consisting of $871 million in cash on the balance sheet and approximately $1 billion available under the company’s $2.4 billion unsecured revolving credit facility. Waste Management is at a cash-rich position compared to its competitors, Republic Services Inc.’s $81.4 million and Stericycle Inc.’s $22.9 million.
The company generated $496 million of cash flow from operating activities in the first quarter of 2010. Waste Management’s next significant debt repayment obligation apart from the August 2010 repayment is $147 million of senior unsecured notes that mature in March 2011.
We thus believe Waste Management is in a position to use its cash flow to reduce its leverage. Reduction of debt will help the company improve its margin even further.
Houston, Texas-based Waste Management Inc. is the leading provider of comprehensive waste management services in North America. The company provides integrated waste management services, consisting of collection, transfer, disposal, recycling and resource recovery, as well as other hazardous waste services to commercial, industrial, municipal and residential customers.
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