OREANDA-NEWS. October 13, 2015. Fitch Ratings has downgraded Waste Italia SpA's (WI) Long- term Issuer Default Rating (IDR) and senior secured notes' rating of to 'CCC' from 'B-'. The Recovery Rating of the notes is 'RR4'.

The downgrade reflects the company's tight liquidity, particularly into 2016, lower EBITDA estimates based on operating issues in landfill in 2015 and a combination of resumed price pressure for 2016 and delay of capacity entering service longer term. Changes in senior management have also affected execution of the company's business plan.

KEY RATING DRIVERS
Strained Liquidity
Based on information given by management relating to the cash position as at 30 September 2015, undrawn factoring facilities and bank overdraft lines, collection of receivables and our estimate of WI's cash generation, Fitch believes that WI has sufficient liquidity to cover the EUR10.5m coupon payment due on 15 November 2015. Parent company Kinexia S.p.A has indicated that it will provide WI with bridge financing to cover its needs if necessary, although there are no written commitments to this effect.

However, liquidity into 2016 is likely to remain strained with additional coupon payment and mandatory cash repayment of EUR10.5m and EUR5m respectively, both due in May 2016. Fitch also notes that the fully drawn EUR15m revolving credit facility (RCF) is subject to a 5.1x net debt /EBITDA covenant test at the end of each quarter. Breaches do not constitute an event of default but lead to a draw-stop and reimbursement at the end of the drawing period of six months for each line. The last compliance certificate sent to the lending bank shows net debt / EBITDA of 4.48x at end-June 2015.

Weak Operating Performance
WI reported a 13% fall in its 1H15 headline EBITDA to EUR21.2m, reflecting weaker volumes and pricing, particularly in landfill. While this was partly caused by one-off factors, WI has had environmental and operational issues at Cavenago and Albonese, respectively and some one-offs will recur in 2H15. Prices have stabilised in collection and landfill, based on a law in late 2014 allowing waste to be transported from one region to the other, absorbing excess capacity.

However, Fitch believes that in a low-growth, low-inflation macroeconomic environment, stable pricing may not persist in future. We have lowered our 2015-18 annual EBITDA estimates by an average of 15% compared with last year. This also reflects delay of capacity coming into service in sorting and treatment at Wastend to 2017, previously expected in 2016 and landfill at Verde Imagna to 2018, previously expected in 2017. We estimate average 2015-17 funds from operations (FFO) interest coverage of around 1.8x and FFO adjusted net leverage of around 5.1x, weaker than our guidelines for the previous rating.

Corporate Governance, Management Change
Kinexia announced plans to merge with Biancamano, aimed at creating a leading group in Italian waste management, in August 2015. The merger will not trigger the change of control covenant in WI's senior secured notes. Although there is no immediate effect on WI, the scope for commercial synergies raises the possibility of a closer relationship in future. Biancamano's debt, currently being restructured, of EUR115m in 2014 was more than 16x EBITDA. Kinexia, which reported net debt of EUR275m in 1H15 and EBITDA of EUR22.3m, is undergoing a complex reorganisation of its own to focus mainly on waste management.

The CEO position at WI vacated by Chirico in February 2015 was filled by Enrico Friz (ex- A2A), leading to some strategic changes and impact on 1H15 results. A new CFO, Alessandro Gregotti, was appointed in September 2015. However, new management has yet to engage with investors.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for WI include:
-Stronger volume growth, of 8.2% total over the next three years versus 6.4% previously, based on higher Fitch GDP forecasts for Italy in 2017-18 (1.5% vs 1% previously)
-Weaker pricing, notably in collection and landfill, from 2016 and lower Fitch inflation forecasts for Italy in 2017-18 (1.4% vs 2% previously)
-Adjusted EBITDA margins to fall 2% in 2015 (1H15 headline -3%) and to fall further, as high- margin landfill capacity falls, until 2018 when Verde Imagna comes onstream, restoring margins to 2014 levels of 36-37%.

RATING SENSITIVITIES
Positive: Future developments that may individually or collectively, lead to positive rating action include:
- Improved liquidity and recurring earnings leading to a more sustainable capital structure.
- FFO adjusted net leverage sustainably below 5.0x and FFO interest coverage above 2.5x on a sustained basis.
- Sustained operational improvement, including receipt of landfill permits as planned.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Further weakening of the liquidity position, expectation of failure to service debt.
- Significantly weaker-than-expected operating performance.
- Substantial delay to grants of landfill permits, resulting in remaining useful life of 3.5 years or less.