Allied Waste to sell $200 million convertible; price talk seen before market open Wednesday

By Ronda Fears

Nashville, April 6 - Allied Waste Industries Inc. announced late Tuesday plans for subsidiary Allied Waste North America Inc. to sell $200 million of 30-year senior subordinated convertible debentures off the shelf to help fund the $1 billion tender for its 10% guaranteed senior subordinated global notes due 2009.

Market sources said indicative terms would not be circulated until early Wednesday.

JPMorgan Securities Inc. and Citigroup Global Markets Inc. are joint bookrunners of the convertible offering, which is scheduled to price after Wednesday's close.

Allied Waste North America also plans to sell $250 million of seven-year senior notes and $400 million of 10-year senior unsecured notes plus a $150 million term loan that was funded on Sunday to fund the previously announced tender for $1 billion of the outstanding $1.4 billion of 10% global notes.

There is a $30 million greenshoe available on the convertible offering.

The 30-year convertible notes will be non-callable for five years with puts in years seven, 10, 15, 20 and 25. Also, there will be a 125% contingent conversion trigger and 125% contingent payment trigger.

Moody's rated the proposed convertible at B3, but lowered the rating on Allied Waste's 6.25% mandatory to Caa1 from B3.

In addition, Moody's confirmed the Ba3 senior implied rating of Allied Waste Industries and changed the outlook to stable from negative.

The rating agency raised the parent's bank debt to Ba2 from Ba3 and confirmed senior secured debt of subsidiaries Allied Waste North America and Browning-Ferris Industries Inc. at Ba3. However, Moody's assigned a B2 rating to the proposed 10-year senior unsecured notes.

Also, Moody's cut the global bonds to B3 from B2.

Moody's said the improved outlook reflects its belief that Allied Waste's attention to asset utilization, cost containment and selective refinancing of its balance sheet has positioned it to derive margin improvement from any economic rebound.

Still, the ratings reflect high leverage at 5.2 times total debt to EBITDA at Dec. 31, or 28 times total debt to free cash flow, and deeply negative tangible equity resulting from sizeable goodwill comprising 60% of total assets. The ratings also incorporate coverage of EBIT to interest of 1.2 times at Dec. 31, with a moderate EBIT return on average total assets of about 7.4%.

Refinancing initiatives in 2003 and earlier this year, as well as scheduled debt maturities and other interest savings initiatives, have lowered interest expense by more than $100 million, Moody's said. However they also resulted in the elimination of a large subordinated debt cushion in the capital structure, which supported the unsecured debt ratings, which is the cause for those downgrades.

Similarly, Moody's said the rating on the proposed convertible bonds reflects its structural and contractual subordination to the substantial liabilities of the subsidiaries, and the downgrade to the mandatory reflects its deeper structural and contractual subordination.

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