Fitch Ratings has downgraded Waste Italia SpA's (WI) Long-Term Issuer Default Rating (IDR) to 'RD' (Restricted Default) from 'C'. Fitch has affirmed WI's EUR200m senior secured notes' rating at 'C'. The Recovery Rating of the notes is 'RR5'.

The downgrade follows the expiry of the 30-day grace period on 15 June 2016, after the company announced it would not pay the EUR10.5m coupon on the EUR200m senior secured notes on 16 May 2016.

KEY RATING DRIVERS

Debt Restructuring Due

Having appointed financial advisor Leonardo&Co. - Houlihan Lokey in February 2016, WI is negotiating with the bondholders' committee a strategic review of its capital structure. The advisors have completed a review of the business plan, while the review of the capital structure will likely be completed during the second half of 2016.

Stressed Liquidity

Fitch estimates that WI had cash, overdraft facilities and unused factoring lines totalling EUR8m-EUR9m as at 20 April 2016. The company was due to make a mandatory cash repayment of EUR5m to holders of the senior secured notes by 29 May 2016. However, this has been postponed, subject to legal confirmation, to 30 days after the publication of audited accounts for 2015 on 13 June 2016. As owner of 44% of GWI, Sostenya Group plc purchased EUR5m of the notes in October 2015. WI and its advisors are negotiating with investors a potential standstill on payment obligations. The repurchased bonds were not cancelled, the legal conditions for a waiver are unclear and we do not assume that the repurchase will offset repayment.

Liquidity is likely to remain stressed through 2016 with an additional coupon payment of EUR10.5m and potential, acquisition of Lafumet Servizi Srl for EUR3.5m, both due in November 2016.

Decline in Landfill Capacity

The useful life of WI's remaining landfill capacity at end-2015 of 3.246m cu m has fallen to 3.4 years. Unless new capacity is authorised, some of the Group's landfills will exhaust available capacity before the maturity of the EUR200m bond in November 2019. The most important extension project, Chivasso3/Wastend, passed the initial stage of the permitting process in November 2015, but permitted additional capacity has been lowered by nearly 30% to 750,000cu m. In view of stressed liquidity, Fitch believes that funding capex for projects such as Chivasso3 remains challenging beyond ordinary annual maintenance (while not 100% binding) capex of EUR11m.

Weaker Operating Performance

The Italian market for waste treatment is highly fragmented, putting competitive pressure on small companies amid weak GDP growth, and this broadly characterised WI's experience of waste collection in 2015.

WI's cash EBITDA in 2015 fell 35% yoy to EUR34m. Based on slower growth in collection volumes and softer pricing, including for landfill, than previously, we lowered our 2016-18 annual EBITDA estimates by an average of 25% in March 2016. This also reflects our view that, given permitting and funding constraints, new capacity is delayed by a year at Chivasso3 to 2018 and at Cavaglia to 2019. This is a more conservative assumption than management's. Based on more competitive pricing, WI has produced a more conservative business plan for 2016-20 than its predecessor in April 2015, with a recovery in revenues and profitability expected only from 2018.

Management Change, Corporate Governance

CEO Enrico Friz resigned in January 2016, and was replaced by Flavio Raimondo, the third CEO in a year. It remains to be seen if further management change will have an impact on this year's results. GWI's plans to merge with Biancamano, which will not trigger the change of control covenant in WI's senior secured notes, have been postponed to end-2016.

Post-merger, GWI has plans for a capital increase of EUR10m-EUR30m. However, given that net debt at Biancamano is currently EUR114m (versus 9M15 EBITDA of EUR5.9m), Fitch believes that a more heavily indebted parent company may be in a weaker positon to provide WI with financial support in the future. Biancamano's debt is due to be restructured before the merger.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for WI include:

-Additional landfill capacity is delayed at Chivasso 3 to 2018 from 2017 and at Cavaglia to 2019 from 2018.

-Collection volumes grow at an annual average of 3% for 2016-19 versus 4.5% for 2015-18.

-Average collection prices of EUR108/t in 2016 and EUR112/t in 2017, slightly below previous estimates, on continued competitive pressures.

- Adjusted EBITDA margins of 30% in 2016, before declining as high-margin landfill capacity falls until 2018 when Chivasso3 comes on-stream, restoring margins to 30%-34%. These compare with 28.3% achieved in 2015.

RATING SENSITIVITIES

Positive: The 'RD' rating will be revised to reflect the appropriate IDR for the issuer's post-restructuring capital structure, risk profile and prospects in accordance with relevant criteria.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

-Entering bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or otherwise ceasing business would result in a downgrade of the IDR to 'D'.