S&P lowers Clean Harbors outlook

Standard & Poor's lowered its outlook on Clean Harbors Inc. to negative from positive including its bank debt at BB.

S&P said the action follows Clean Harbors' announcement of weaker-than-expected first-quarter earnings, revised earnings guidance and reduced liquidity position.

These developments highlight, in part, the challenges associated with the integration of the Chemical Services Division acquired from Safety-Kleen Corp. in late 2002.

As a result of the lower-than-expected earnings, the company was in violation of financial covenants for the period under Clean Harbors' loan agreements. Subsequently, the company has obtained a waiver and amended the loan agreements to loosen its financial covenants for future periods, although the company has limited cushion under revised covenants in the absence of improving operating results.

The capital structure is highly leveraged, with debt to capital, including operating leases, at about 85%, S&P said. However, key credit measures are expected to improve and remain acceptable for the rating, with total debt/EBITDA of 2x to 2.5x and EBITDA interest coverage at about 4x.

There are integration risks with the much larger CSD operations, but the synergies, most of them from personnel reductions and other cost savings, seem reasonable and attainable, S&P said. The company is on track with respect to achieving cost-savings, including headcount reductions, although deficiencies in CSD's financial systems, processes and internal controls could cause some difficulty during the integration process.

S&P upgrades LifePoint loan

Standard & Poor's upgraded LifePoint Hospitals Inc.'s senior secured bank loan to BB from BB- and confirmed its corporate credit rating at BB-. The outlook is positive.

S&P said it upgraded Province's loan because of the growth in the company's assets and cash flow.

At their current levels, S&P said it believes these measures offer a strong likelihood of full recovery of bank debt in the event of default.

The ratings reflect LifePoint's limited size and potential for operating vulnerability due to industry risks, S&P said. The ratings also reflect the likely continuation of significant acquisition activity, which may hurt the company's future financial profile. These factors are modestly offset by leading positions in the small markets it serves.

Nevertheless, the company's revenue concentration in two states leaves it vulnerable to legislative and economic changes within these markets, S&P said. LifePoint also will continue to experience cost pressures in key expense items such as labor and insurance. Furthermore, LifePoint is subject to the uncertain future of government reimbursement. The environment for managed-care payments to hospitals, though currently favorable, is expected to be less so.

LifePoint Hospitals has been active in its efforts to improve its cash flow, S&P said. At the same time, the company has continued with its acquisition strategy without weakening its credit-protection measures. The company's use of both equity and low-cost debt during the past two years has enabled it to fund significant acquisition activity, yet maintain a capital structure that is solid for the rating. Improving performance, highlighted by an operating margin that has increased to about 23% in 2002 from 18% in 2000 helped improve cash coverage of interest to 11.6x in 2002 from 6.4x in 2001.

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