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Tervita sells debt to refinance after another downgrade

Moody’s has downgraded Tervita Corp. after rival rating agency Standard & Poor’s slashed its rating in January.

MIKE SEGAR/REUTERS

The knocks against Tervita Corp. keep piling up.

First the company was downgraded by rating agency Standard & Poor's in January. Now it's been downgraded by rival agency Moody's Investors Service.

Tervita's big problem: too much debt. After being taken private in a $3.5-billion leveraged buyout in 2007 led by founder David Werklund, the company just hasn't had enough cash flow to dig itself out of the debt hole. Tervita provides waste management and energy services, and it was recently awarded the government contract to help clean up areas that were severely damaged by this summer's floods, such as High River, Alta.

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The company's debt is now 10 times its earnings before interest, taxes, depreciation and amortization.

"Tervita's cash flows have underperformed our expectations since the company's rating outlook was changed to negative earlier this year," Moody's noted, later adding in a statement that while the leverage is expected to come down next year, it will still be about seven times its cash flow.

Tervita's corporate family rating was downgraded to Caa1 from B3, while its senior unsecured debt was affirmed at Caa2.

Management have long acknowledged that the company's debt is problematic, but it just hasn't had the cash flow it needs to support itself on its own. To get its balance sheet in order, Tervita announced plans on Monday to sell up to $350-million (U.S.) of new debt. The funds from that debt will be used to repay holders of the company's existing bonds, which bear 11-per-cent interest and come due in 2015.

While Tervita "has a diverse list of blue-chip customers" and the "long-term industry fundamentals are favourable," Moody's is "is concerned that unless there is some growth in earnings in the next few years that the company's capital structure may be untenable."

To get back in the rating agency's good books and possibly earn an upgrade, Moody's said the company will need to get its debt down to 6.5 times EBITDA.

The company currently has $2.6-billion of debt outstanding.

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Less than a year and a half ago, there was hope that Tervita could possibly go public, allowing its private backers to cash out. But those hopes are all but dashed as the company gets its fiscal house in order.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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