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TEXT-S&P revises Tervita Corp outlook to negative
2012年10月4日 / 晚上8点28分 / 5 年前

TEXT-S&P revises Tervita Corp outlook to negative

Overview
     -- We expect Tervita Corp.'s 2012 debt-to-EBITDA to deteriorate above 
6.5x through the next 12 months due to soft industry conditions, which will 
lead to weaker-than-expected EBITDA generation.
     -- We are revising our outlook on Tervita to negative from stable.
     -- We are affirming our 'B' long-term corporate credit rating.
     -- The 'B' issue-level rating on the company's senior secured debt, and 
its 'CCC+' issue-level ratings on Tervita's unsecured and subordinated debt 
are unchanged, as are the '3' and '6' recovery ratings on the secured and 
unsecured debt, respectively. 
     -- The outlook revision reflects our view that Tervita's EBITDA through 
the second half of 2012 and into 2013 will be significantly lower than 
expected due to lower drilling activity and weather-related issues. 

Rating Action
On Oct. 4, 2012, Standard & Poor's Rating Services revised its outlook on 
Calgary, Alta.-based Tervita Corp. (formerly CCS Corp.) to negative from 
stable. At the same time, Standard & Poor's affirmed its 'B' long-term 
corporate credit rating on Tervita, its 'B' issue-level rating on the 
company's senior secured debt, and its 'CCC+' issue-level ratings on Tervita's 
unsecured and subordinated debt. The '3' recovery rating on the secured debt 
and '6' recovery rating on the unsecured and subordinated debt are unchanged, 
and indicate our expectation of meaningful (50%-70%) and negligible (0%-10%) 
recovery, respectively, under our default scenario. 

Standard & Poor's had expected Tervita to generate significant EBITDA in 2012 
such that debt-to-EBITDA would improve below 5.7x at year-end 2012. However, 
lower drilling activity combined with wet weather and delays in facilities 
coming online have reduced our expectations for the company's 2012 and 2013 
EBITDA. We forecast 2012 EBITDA to be C$370 million-C$400 million, down from 
our original expectation of C$420 million-C$450 million; we project Tervita to 
end 2012 with about 7.0-7.5x debt to EBITDA. We, however, expect 
debt-to-EBITDA to improve but remain elevated above 5.5x in 2013.

Rationale
The ratings on Tervita reflect Standard & Poor's view of the company's "fair" 
business risk profile and "highly leveraged" financial risk profile. Our 
ratings take into account the company's high debt leverage due to management's 
aggressive financial policy, participation in the competitive and cyclical 
oilfield services market, and lack of long-term contracts. The ratings also 
incorporate our positive assessment of Tervita's relatively stable operating 
margins and integrated strategy that provides cross-selling opportunities. In 
our opinion, the company's financial risk profile constrains the ratings. 

Tervita is an integrated environmental service company that provides services 
in various fields, including but not limited to energy-related waste 
management, environmental remediation, and well servicing. Most of its 
operations are in western Canada (85% of gross profit), with some in the U.S. 
As of June 30, 2012, the company had about C$2.58 billion in adjusted debt 
(adjusted mostly for operating leases and asset-retirement obligations), 
compared with C$2.38 billion of balance-sheet debt.

In our view, Tervita's highly leveraged financial risk profile, which reflects 
its high debt-to-EBITDA ratio and large cash flow requirements to service its 
fixed charges, constrain the ratings. The company finished 2011 with about a 
6.9x debt-to-EBITDA ratio; given our revised assumptions for Tervita's 2012 
results, we expect the company to finish 2012 with about a 7.0x-7.5x 
debt-to-EBITDA measure. We forecast the company to end 2013 with 5.5x-6.5x 
debt-to-EBITDA. We estimate its annual fixed charges (maintenance capex, debt 
amortization, and interest expense) at C$300 million-C$350 million annually 
for 2012 and 2013, which is high compared with 2011 EBITDA of C$340 million 
and our expected 2012 EBITDA of C$370 million-C$400 million.

We view management's financial policy as aggressive. We believe Tervita's 
financing of capital expenditure plans through debt for the past few years and 
management's plan to improve credit measures through EBITDA growth instead of 
debt reduction as risky. Although the company's EBITDA has improved 
marginally, additional debt on the balance sheet to fund capex has hindered 
significant improvement in its credit measures and constrained return on 
capital at less than 3%. Tervita will spend C$650 million-C$700 million in 
capex in 2012-2013; it will fund 2012 capex partially through additional debt 
but plans to keep 2013 capex within cash flow. Given the additional debt, we 
expect the company's debt-to-EBITDA to remain above 7.0x through 2012 and 5.5x 
through 2013. 

Tervita's EBITDA and revenue generation depend largely on the highly volatile 
oil and gas industry in the North America market. About 75%-80% of the 
company's revenues are exposed to that industry, and we expect the proportion 
to stay the same. We believe that Tervita's exposure to North America also 
exposes it to the volatility of its clients' capital budgets and operations, 
which can be pulled back in times of weak commodity prices. Lower drilling rig 
count and E&P companies' reduced capex plans are significant factors in 
Tervita's lower forecast EBITDA in second-half 2012; in addition, wet weather 
and delay in bringing some facilities online have also stressed EBITDA 
generation.

Furthermore, as is typical for the services, the work the company's conducts 
for customers is not contracted; instead, there are pricing agreements with no 
guarantees for minimum volumes. We believe that Tervita's cash flows are 
vulnerable to a sudden loss in revenues should customers scale back 
operations, decide to perform the services themselves, or use services from a 
competing firm. 

The company supports production activities (about 65% of revenues), rather 
than drilling-related activities, which mitigates the volatility in its 
profitability to some extent. We expect operating margins to remain relatively 
stable in trough industry conditions when compared with that of other 
companies exposed to the oil and gas sector. Tervita's fluids and solids 
services segments generate stable margins (about 65% of the company's total 
gross profit), despite some volume fluctuation. In the past five years, 
including the 2008-2009 downturn, Tervita's EBITDA margin (total EBITDA 
divided by total revenues less marketing revenues) ranged from 26%-30%, 
compared with 14%-35% (trough-peak margins) for other oilfield service 
companies. 

In our view, Tervita's recent strategy of marketing all its business segments 
under one umbrella, instead of a fragmented method, should enhance its 
diversification. Management's integrated marketing approach and the 
opportunity to cross-sell different servicing opportunities in the currently 
beneficial industry condition (horizontal drilling and associated pressure 
pumping) should facilitate the company's revenue and EBITDA growth.

For 2012 and 2013, we have forecast the following:
     -- Gross profit and EBITDA growth of 15%-25% in 2012 and 2013. 
     -- Tervita will spend C$650 million-C$700 million in capex for 2012 and 
2013.
     -- Most of the growth is from the fluids services and Tervita U.S. 
segments.

Based on our assumptions, the company will end 2012 with a 6.7x-7.2x 
debt-to-EBITDA and 2013 with a 5.5x-6.5x debt-to-EBITDA. We believe EBITDA 
interest coverage will remain below 2.5x through 2013. Our assumptions do not 
forecast that Tervita will complete an IPO in this period but we expect credit 
measures to improve significantly provided the company uses any potential IPO 
proceeds to pay down debt.

Liquidity
We believe Tervita's liquidity is adequate. Sources of liquidity can cover the 
company's near-term needs, even in the event of unforeseen EBITDA declines. 
Our assessment of Tervita's liquidity profile incorporates the following 
expectations and assumptions:
     -- We expect the company's sources of liquidity, including proceeds from 
the new notes offering, FFO, cash, and facility availability, to exceed its 
uses by 1.2x in the next 12 months.
     -- We expect net sources to remain positive even if EBITDA declines more 
than 15%.
     -- Compliance with financial covenants will survive a 15% drop in EBITDA, 
in our view.
     -- Due to the refinancing risk associated with Tervita's bank debt, we 
believe the company would be unable to absorb low-probability, high-impact 
shocks.

Tervita's sources of cash include about C$9.8 million of cash on hand as of 
June 30, 2012. It had about US$161.3 million and about C$39 million available 
under its U.S. and Canadian senior secured credit facility, respectively. 
Although the company has a large capital budget of C$650 million-C$700 million 
in 2012 and 2013, we expect it will be able to fund it through cash from 
operations and revolver borrowings. In the case of a downturn, we expect 
Tervita to be able to pare back its capital expenditure plans meaningfully to 
manage its liquidity and limit outspending its cash flow.

The credit facility has maximum secured debt-to-EBITDA of 5.75x financial 
covenant. As of March 31, 2012, the company's reported of the covenant at 
4.18x, which provides adequate cushion (about 27% of EBITDA drop) in case of a 
downturn.

Recovery analysis
For the complete recovery analysis, see "Recovery Report: CCS Corp.'s Recovery 
Rating Profile," published Jan. 11, 2012, on RatingsDirect on the Global 
Credit Portal. 

Outlook
The negative outlook reflects our view that Tervita's credit measures will 
remain elevated at above 7.0x debt-to-EBITDA as it exits 2012. Despite 
improved EBITDA compared to 2011 levels, due to additional debt on the balance 
sheet, the company's debt-to-EBITDA will remain elevated throughout our 
forecast period. We deem Tervita's leverage metric as high relative to its 
overall business risk profile and we regard management's financial strategy as 
risky. At current EBITDA and debt, the company has little flexibility in 
adding debt without affecting the ratings.

We would downgrade Tervita if the company is unable to generate improved cash 
flow so that expected debt-to-EBITDA ratios stays within 7.0-7.5x through 
first-quarter 2013, without any positive trend. This could also occur if 2013 
gross profit grows less than 15% from 2011 level. Also, debt-financing of 
growth initiatives, either acquisition or capital expenditures, without 
prospects for rapid deleveraging, could lead us to revisit our ratings and 
outlook on Tervita. A deterioration in its liquidity position could also 
compromise the ratings.

An outlook revision to stable for Tervita would depend on an improving 
financial risk profile, For example, if the company's debt-to-EBITDA improves 
to 5.0x-5.5x by reducing debt post-IPO. From an operational perspective, if we 
expect Tervita to demonstrate continued EBITDA growth, either through lower 
overhead costs or more cross-selling opportunities, such that we expect 
debt-to-EBITDA to improve below 5.5x, we could revise the outlook to stable. 

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- Key Credit Factors For Global Oilfield Services Companies, May 31, 2006
     -- Global Oilfield Service Company Characteristics and Keys to Success, 
Jan. 11, 2005

Ratings List
Tervita Corp.

Outlook Revised To Negative
                                        To                   From
 Corporate credit rating                B/Negative/--        B/Stable/--

Ratings Unchanged
 Senior secured debt                    B
  Recovery rating                       3
 Senior unsecured debt                  CCC+
  Recovery rating                       6
 Subordinated debt                      CCC+
  Recovery rating                       6


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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