Casella Waste takes wait-and-see approach to refinancing 2014 notes

By Paul Deckelman

New York, June 28 - Casella Waste Systems Inc. would like to do a refinancing transaction on its $180 million of high-coupon secured bonds - but it realizes that now is not the time to do so.

And with the recent worsening of debt market conditions versus earlier this year, the company can't say when such a deal might get done.

The Rutland Vt.-based waste management and recycling company's chief financial officer said Thursday that for now, "we continue to monitor the market and will complete a transaction when the benefit exceeds the cost."

Edwin D. Johnson told analysts on the company's conference call following the release of its results for the fiscal 2012 fourth quarter and full year ended April 30 that "the timing of the second-lien note refinance has become less certain."

Market moves 'against us'

He said that "the markets have been very fickle this year. Had we been able to do a transaction two months ago" to refinance those 11% second-lien senior secured notes due July 15, 2014, "we would have looked to save from $8 [million] to $10 million a year in cash interest."

Those bonds become callable a little more than two weeks from now, on July 15, at 1051/2, or a premium of $9.9 million for the whole issue, Johnson said.

"Our original estimates were a cash interest savings of over $10 million, worth the one-time charge of the premium."

But that was then - and this is now.

With average junk bond yields having risen by about 50 basis points since the high-yield market's optimum conditions at the end of April heading into early May and with average junk spreads having widened out by around 60 bps, taking Treasuries' movements into account, "now the markets have moved a little bit against us and made that transaction negative because of things like Libor floors and original issue discounts that we'd be required to accept," the CFO lamented.

"The premium now exceeds one year of the cash interest benefit."

Deal timing up in the air

In answer to an analyst's question about when conditions might permit a refinancing deal to get done, he said that "the timing is very difficult because it depends on what happens to the market. What happens in Europe is having a big effect. So it's just very hard to guess when that could get done."

Johnson said that over the last two years, "we've been very disciplined on making sound financial decisions for our shareholders, so as much as we would like to lower interest costs now, it is not prudent to rush into a significantly negative [net present value] trade that would make us pay for it in the long run."

He explained that "the market right now is on a risk-off position. Just two months ago, it wasn't."

With the kind of premiums investors would be demanding at this point in order for a company like Casella to do a deal to refinance the 11% notes - the secured bonds carry a B3/BB- rating, but its unsecured debt is rated down at Caa2/CCC+ - Johnson said that rushing into a deal now "could encumber the company with higher interest rates than we need over the next six or seven years."

Waiting as an option?

From Casella's perspective, it could make sense to wait. The company's chairman and chief executive officer, John W. Casella, pointed out that under the call structure for those 11% notes, "the premium goes away in the next 12 months; the 105.5 goes to par in another 12 months," by which time market conditions for a refinancing may have improved - or perhaps not. Johnson acknowledged that "as the fluctuations in Europe happen, it's just impossible to predict when it goes back to a stronger position."

While waiting for things to get back to normal, he said that "we continue to look for solutions to delever. I think we have to be very smart about the way we do things, though."

For now, he said the potential refinancing of the notes and whatever interest saving that could be realized have not been reflected in Casella's cash flow guidance, "and again, we will disclose a transaction when it occurs and will restate guidance at that time."

At the end of the fiscal fourth quarter on April 30, Casella's balance sheet showed $4.53 million of cash and $473 million of long-term debt, most of it in the form of outstanding junk bonds. Besides the $180 million of the 11% second-lien notes due 2014, the capital structure also included $200 million of 7¾% unsecured notes due 2019 that it sold last year.

There were also some outstanding borrowings under the $227.5 million revolving credit and letter of credit facility due on March 18, 2016 that the company entered into last year. If Casella fails to refinance the 11% notes by March 1, 2014, the revolver's maturity date will accelerate to March 31, 2014. However, the revolver also contains an accordion feature giving the company the ability to borrow an additional $182.5 million, subject to certain conditions - funds that it could use to finally take out the 11% notes before that early 2014 deadline.

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