Casella Waste wrestles with 11% notes, but not worried about covenants

By Paul Deckelman

New York, Aug 30 - Casella Waste Systems Inc. is still up in the air about what to do about its $180 million of 11% second-lien senior secured notes scheduled to come due on July 15, 2014. The company is weighing whether to call them now or wait a year.

"We continue to work on the refinancing of our most expensive debt - our second-lien notes - and are working to find either a cost-justifiable way to take them out this year or arrange for their replacement next July, when they are callable at par," Edwin D. Johnson, the company's chief financial officer, said on a Thursday conference call following the release of fiscal 2013 first-quarter numbers by the Rutland, Vt.-based solid waste disposal and recycling company.

"This is a dramatic game-changer to our balance sheet and cash flows," he declared.

To call or not to call?

Johnson told analysts on the call that the company's dilemma is whether to pull the trigger on some kind of a deal to refinance the notes now and save a year of hefty interest payments or whether to wait a year, when the bonds become callable at par, saving the roughly $10 million call premium that it would have to pay now, when the bonds can only be redeemed at a price of 105½ plus accrued interest.

"The big hurdle is the $10 million call premium and being able to recapture as much of that in interest savings as we can for the rest of the year," Johnson said.

On the company's previous conference call - held on June 28, when it released the results for the 2012 fiscal fourth quarter ended April 30 - Johnson had lamented that the high-yield market's conditions had dramatically deteriorated from the optimum deal environment that had been seen around two months before, with average junk bond yields having risen in the interim and their spread over Treasuries having widened out. He said at that time that things had changed so much that they "made that transaction negative [in terms of net present value] because of things like Libor floors and original issue discounts that we'd be required to accept. The premium now exceeds one year of the cash interest benefit."

On the latest conference call, Johnson clarified that "we always had the option to do it. The markets were there, there wasn't any issue except for the economics of it. So we continue to look at ways to either get it closer, get it to something that is not such a hit for us to take now, or just have it all arranged to take care of it next July."

A difference of opinion

During the question-and-answer portion of the call that followed the formal presentations by Johnson and by John W. Casella, the company's chairman and chief executive officer, an analyst bluntly asked whether it wouldn't be better to just "get some of this stuff out of the way," particularly the 11% notes, suggesting that if the company were to wait until next year to deal with them, market conditions could conceivably be even less favorable for a refinancing than they might be now.

Johnson acknowledged that "that's a real factor in the analysis in terms of whether or not you go forward and do that refinancing now."

He said, "That's why we continue to work on it now, to try to find the right formula in terms of refinancing the balance sheet."

Market risk, he continued, "is significant. No one knows where the market is going to be in the next 12 months."

The analyst disputed Johnson's contention that the market had really "moved away" from Casella in the several months since the springtime. "I'm scratching my head over that," he said. He noted that if anything, yields and spreads are now at or near their lows for the year, making this a better time to come to market with a re-fi deal.

CEO Casella tried to argue that "it wasn't just that the market moved away, but our credit rating went down as well and put us into a different bucket." But his questioner pointed out that "that bucket has a huge market need for product [i.e., bonds], so there's demand for it."

And the questioner noted that people have been analyzing the potential value of the company's various assets since "two years ago," suggesting that maybe it was just time to do some kind of a sale that would theoretically raise proceeds to deal with the debt question "and move on."

However, Johnson replied that "these aren't just things that you just call somebody and sell tomorrow. These are things that require significant lead time to get the right buyer and to do the right analysis, to make sure we're doing the right thing."

Performance falls off

For the fiscal first quarter ended July 31, revenues were $121.2 million, down $6 million, or 4.7%, from the same quarter last year, as positive collection pricing was more than offset by lower solid waste volumes and lower recycling commodity prices.

Operating income was $5.8 million for the quarter, down $4.5 million from a year ago, while adjusted EBITDA was $24.3 million, down $4.4 million year over year.

Casella posted a wider net loss of $8.4 million, or 31 cents per share, versus year-earlier red ink of $3.1million, or 12 cents per share.

With that kind of reduced financial performance, an analyst asked whether the company was coming close to breaching the requirements of the financial covenants in its credit facility agreement.

Johnson noted that "back in April, we worked closely with our banks to reset the covenants," giving the company a little more breathing room, but now, with the new fiscal year having begun, the company faces additional challenges due to its having to have put off refinancing the 11% notes as well as operational weaknesses.

He acknowledged that "right now, the low end of our forecasts would put us close to [the limits of] our interest coverage covenant, but the banks are aware of that, and we're working very closely with them, so I'm not overly concerned about it."

As of the end of the quarter, the company's earnings covered its interest requirements by a ratio of 2.3 times, above the minimum required coverage of at least 2.15 times although down from 2.49 times at the end of fiscal 2012.

Its ratio of total funded debt to EBITDA stood at 4.96 times, inside of the maximum allowed 5.25 times, though up from 4.62 times at the end of 2012, while senior funded debt was 2.95 times EBITDA, inside the 3.25 times maximum, though up from 2.70 to end fiscal 2012.

Johnson noted that "we work with [the banks] on a monthly basis."

Revolver could accelerate

Total debt and capital leases at the end of the first quarter came to $488.7 million, up from $474.5 million at the end of fiscal 2012. Most of the debt was in the form of outstanding junk bonds. Besides the $180 million of the 11% notes, 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 facility due 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.

The company had $3.5 million of cash and equivalents at the end of the first quarter, down from $4.5 million the quarter before.

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