OREANDA-NEWS. Fitch Ratings has affirmed Waste Connections, Inc.'s (WCN) Issuer Default Rating (IDR) and debt ratings of 'BBB' on its unsecured credit facility, unsecured term loan and senior unsecured notes. The Rating Outlook is Stable. WCN's outstanding debt as of Sept. 30, 2015 was $1.9 billion.

KEY RATING DRIVERS
On Jan. 19, 2016, WCN announced that it had entered into a definitive agreement to merge in an all-stock transaction with Progressive Waste Solutions Ltd. (Progressive). The transaction has been unanimously approved by both companies' Boards of Directors and is expected to close in the second quarter of 2016. The merger would combine the third and fourth largest North American waste management services companies.

Fitch believes the merger would allow WCN to significantly expand its size and scale while preserving a moderate leverage level and significant financial flexibility. WCN's LTM debt/EBITDA was roughly 2.7x as of Sept. 30, 2015 while Progressive's LTM leverage was approximately 3.05x over the same period. Fitch expects the combined entity to operate within the 3x leverage range as no incremental debt will be raised as part of the transaction and $50 million in annualized SG&A cost savings is projected within the first 12 months. Progressive had roughly $1.5 billion in senior secured credit facility debt outstanding as of September 2015 that will be refinanced along with WCN's current credit facilities and replaced by a single senior facility on an unsecured basis.

Positive credit considerations from the merger would include an expanded geographic footprint, improved free cash flow (FCF) generation and operational improvements from rationalizations. Though domiciled in Canada, roughly 60% of Progressive's 2014 revenue came from the United States. More specifically, much of Progressive's recent growth has come in states such as Texas, Louisiana and Florida with the company's U.S. South segment representing 45% of 2014 revenue.

KEY ASSUMPTIONS
--If completed, the merger with Progressive will be an all-stock transaction with no associated debt issuance;
--No significant debt will be paid down outside of scheduled note maturities as they come due and refinancings as part of the transaction in the near term;
--The combined company will generate at least approximately $1.25 billion in adjusted EBITDA.

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--A significant decrease in the proportion of the company's business tied to E&P waste;
--Reducing leverage (Total Debt/Fitch-calculated EBITDA) to below 2.5x for an extended period;
--A sustained increase in the company's cash liquidity to above $50 million.

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

--A change in financial policy that results in leverage increasing above 3.25x for a sustained period;
--A steep decline in the free cash flow margin to below 3%;
--An adverse environmental development at a landfill that leads to significant liquidity pressure;
--A significant operational setback in the merger integration process resulting in significant liquidity pressure.

LIQUIDITY
Fitch anticipates further liquidity improvement from an already strong 11% WCN FCF margin (after dividends). Part of the improved cash generation will come from projected annual tax savings of about $50 million as a result of the transaction. WCN has paid an effective tax rate of 39% in recent years and this is expected to decline to roughly 27%, contributing to the projected 15% FCF margin for the combined entity. In addition, the two companies had a combined $59 million in cash and available securities and nearly $2 billion in availability under credit agreements as of September 2015, though these agreements are expected to be refinanced as part of the transaction.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following:

Waste Connections Inc.
--IDR 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Unsecured term loan at 'BBB';
--Senior unsecured notes at 'BBB'.