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TEXT-S&P assigns Clean Harbors 'BB+' senior unsecured rating
July 16, 2012 / 5:13 PM / 5 years ago

TEXT-S&P assigns Clean Harbors 'BB+' senior unsecured rating

Overview
     -- U.S.-based environmental services company Clean Harbors plans to issue 
$600 million of senior unsecured eight-year notes to refinance maturing debt.
     -- We are affirming our ratings, including our 'BB+' corporate credit 
rating, and are assigning a 'BB+' senior unsecured debt rating and '4' 
recovery rating to the proposed notes.
     -- The stable outlook reflects our expectation that Clean Harbors' credit 
quality will remain consistent with the ratings, incorporating a fair business 
risk profile and intermediate financial risk profile.


Rating Action
On July 16, 2012, Standard & Poor's Ratings Services affirmed its ratings, 
including its 'BB+' corporate credit rating, on Clean Harbors Inc.. The
outlook is stable. We also assigned our 'BB+' senior unsecured debt rating to
Clean Harbors' proposed offering of $600 million of senior notes due 2020. The 
recovery rating is '4', indicating average recovery (30% to 50%) in the event 
of payment default. Clean Harbors plans to use the proceeds of this offering 
to fund a tender offer for its senior secured notes due Aug. 15, 2016, as well 
as to provide funding for future acquisitions and general corporate purposes. 
We will withdraw our ratings on the secured notes following completion of the 
unsecured notes issuance and tender offer.

Rationale
The affirmation reflects our view that despite the increase in debt following 
the proposed notes tender, Clean Harbors' credit measures are not likely to 
deteriorate significantly and management will remain committed to maintaining 
prudent financial policies as it executes its growth strategy.

The ratings on Norwell, Mass.-based Clean Harbors reflect the company's 
"intermediate" financial risk profile (including environmental liabilities), 
an acquisition-oriented growth strategy, and some susceptibility of its 
operations to economic cycles. The company's leading competitive position in 
the hazardous waste management industry, good diversity, specialized assets, 
and "strong" liquidity with a favorable debt maturity schedule partially 
offset these factors. Standard & Poor's characterizes Clean Harbors' business 
risk profile as "fair." 

With roughly $2.2 billion in revenues, Clean Harbors is one of the largest 
providers of environmental services and the largest operator of nonnuclear 
hazardous waste treatment facilities in North America. The company's 
operations include:
     -- Technical services (38% of sales), which include collection, 
transport, treatment, and disposal of hazardous and industrial wastes;
     -- Field services (8%), which include specialty, on-site maintenance 
services such as tank cleaning, decontamination, remediation, and spill 
cleanup;
     -- Industrial services (27%), such as high-pressure and chemical 
cleaning, catalyst handling, decoking, material processing, and lodging 
services to energy and industrial companies; and
     -- Oil and gas field services (27%), including fluid handling, downhole 
servicing, directional boring services to oil and gas exploration, production, 
and power generation customers.

Clean Harbors' competitive market position contributes to our assessment of 
its business risk as fair. The company handles more than two-thirds of the 
commercial hazardous incineration volume and roughly 20% of hazardous landfill 
volume in North America. The company's core business is performing well, 
partly because of increased exposure to the oil and gas end market from a 
series of acquisitions made since 2009. End-market diversity is good, and 
revenues in many of its sectors have increased. Landfill volumes and 
incinerator utilization were strong in 2011 and remain so. In the first 
quarter of 2012, landfill volumes increased 19% year over year and 
incineration utilization rose 5% to 90%. Still, the company's operations are 
subject to economic cycles, as recessions give rise to lower waste volumes and 
overcapacity in some segments. Yet the company maintained solid operating 
performance through the last recession despite weaker demand from its 
chemical, manufacturing, and utilities customers, along with a nationwide 
reduction in landfill volumes and volatile fuel and labor costs during this 
period.

Our performance expectations for 2012 include:
     -- Sales growth of 12% as a result of the contributions from acquisitions 
the company made in 2011, increased waste volumes, and modest improvements in 
pricing;
     -- EBITDA margins of 18% to 19% because of continued profitability from 
oil and gas, refinery, and chemicals markets, along with good operating 
leverage; and
     -- Free cash flow that approaches $100 million partly because of improved 
working capital management.

The company's trailing-12-month EBITDA margins as of March 31, 2012, were 19%. 
We believe the company should be able to maintain this level if it contains 
costs in spite of a weak but gradually improving economy and pricing 
competition. Clean Harbors' profitability has consistently increased over the 
past decade, from 13% in 2002 (the year that the company acquired the chemical 
services division of Safety-Kleen Systems Inc.). 

We characterize Clean Harbors' financial risk profile as intermediate, mainly 
because of its prudent financial policies, favorable credit measures, and 
strong liquidity. Acquisitions are a key part of the company's growth 
strategy, but we don't believe that potential acquisitions will impede credit 
quality or forestall potential further financial improvement. Clean Harbors 
has operated with significant excess cash balances since 2008 and has 
demonstrated a willingness to use equity and cash on hand in addition to debt 
borrowings as sources of financing for large acquisitions. We believe the 
company will continue to strike a prudent balance between its growth 
objectives and financial policy decisions.

Environmental liabilities remain significant but manageable. Clean Harbors has 
$169 million of closure, postclosure, and remediation obligations, with 
another $3 million classified as reasonably possible. Substantially all of 
these liabilities resulted from the company's 2002 purchase of the assets of 
Safety-Kleen's chemical services division and other assets. Annual estimates 
for the costs of managing these environmental liabilities are roughly $10 
million to $15 million.

As of March 31, 2012, Clean Harbors' funds from operations (FFO) to debt ratio 
was 43% and debt to EBITDA was 1.9x. Pro forma for the notes refinancing, we 
expect these measures to deteriorate slightly, to 35% and 2.1x. We adjust its 
debt figure to include the capitalization of operating lease commitments, 
tax-adjusted asset retirement and environmental obligations, accrued interest, 
and tax-adjusted self-insurance liabilities. We believe the company will be 
able to maintain FFO to debt of more than 30%--a level we consider appropriate 
for the ratings. Clean Harbors has continued to exceed this mark, as a 
combination of improving waste volumes, large-scale project work, and 
continued investment in oil and gas production have increased demand for the 
company's services.

Liquidity
We expect liquidity to remain strong (as defined in our criteria) given the 
company's good internally generated cash flow and healthy availability under 
its revolving credit facility. As of March 31, 2012, Clean Harbors had about 
$247 million of cash and marketable securities and $165 million of 
availability under a $250 million revolving credit facility due May 31, 2016. 
Pro forma for the $30 million partial redemption of the secured notes, the 
issuance of unsecured notes, and the tender offer for the remaining secured 
notes, we expect Clean Harbors' cash balance to rise to roughly $300 million 
after accounting for call premiums and transaction fees. The company's 
liquidity should remain sufficient to fund acquisitions and internal 
investments. There are no significant debt maturities until the revolving 
facility maturity in 2016. We expect Clean Harbors to generate substantial 
discretionary cash flow in 2012. 

Key uses of cash are likely to include:
     -- Capital spending of roughly $180 million; and
     -- Acquisition spending, which may exceed $100 million.

The company was in compliance with its fixed charge ratio financial covenant 
as of March 31, 2012, and we expect the company to retain adequate headroom 
under the covenant during the near-to-intermediate term.

Recovery analysis
For the detailed recovery analysis, see our recovery report on Clean Harbors, 
to be published following this report on RatingsDirect.

Outlook
The outlook is stable. We believe that Clean Harbors will continue to maintain 
strong liquidity and manage its growth initiatives prudently. In our view, 
despite the additional debt, the company's credit measures will likely remain 
above the minimum consistent with the ratings as cash flow generation 
improves. The company has adequate cushion for the ratings to execute its 
growth strategy. The stable outlook also reflects our view that its liquidity 
and cash flow generation should continue to support the company's acquisitions.

Although unlikely, we could lower the ratings if cash flow declines 
substantially because of a weak economy, which would lead to lower waste 
volumes and capacity utilization rates than we expect, or if the company 
undertakes other sizable debt-financed acquisitions that weaken its financial 
risk profile. Under our projections, we estimate that if revenues underperform 
our expectations by more than 6% and EBITDA margins fall precipitously to less 
than 12%, then FFO to debt could deteriorate to about 20%, which could prompt 
a modest downgrade. We could also lower the ratings if unexpected cash outlays 
or financial policy decisions reduce liquidity or stretch the financial 
profile beyond what would be appropriate for the rating.

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011 
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009


Ratings List
Ratings Affirmed

Clean Harbors Inc.
 Corporate Credit Rating                BB+/Stable/--      
 Senior Secured                         BB+                
  Recovery Rating                       4                  

New Rating

Clean Harbors Inc.
 $600 mil sr unsecd nts due 2020        BB+                
   Recovery Rating                      4                  


 

Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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