Rating Action Overview

• Our preliminary ratings on Australia-based Recycle and Resource Operations Pty Ltd. (Bingo) reflect its vertically integrated operating structure, landfill and recycling assets, strong presence in the Sydney market, and leverage to the structural shift toward greater recycling. Recycle and Resource Operations Pty Ltd. is a holding company for the proposed acquisition of Bingo Industries Ltd.
• The company's small scale and limited geographic diversity; exposure to cyclical end-markets; limited track record in its current form; commissioning, regulatory, and environmental risks; and highly leveraged capital structure constrain the ratings.
• Bingo intends to issue a A$825 million secured term-loan B (TLB) to refinance its capital structure and partly fund its buyout by Macquarie Infrastructure and Real Assets (MIRA), which we view as strategic owners. The capital structure will also include a A$100 million first lien delayed draw TLB (capex) facility and A$75 million revolver facility.
• On June 28, 2021, S&P Global Ratings assigned its preliminary 'B' long-term issuer credit rating to Bingo. We also assigned our preliminary 'B' long-term issue rating to the proposed TLB facilities to be issued by the company.
• The stable outlook reflects our expectation that Bingo will maintain debt to EBITDA within a range of 5x to 6x over the medium term as the business grows its scale and geographic diversity.

Rating Action Rationale

Bingo's vertically integrated business model and capital assets enhance its Sydney market position.  Bingo participates across the value chain in the collection, recycling, and disposal of waste from the construction and infrastructure industries in Sydney and Melbourne. About three quarters of group EBITDA is generated from the post collections segment, which enjoys higher margins and higher capital barriers than collections and should continue to benefit from the growing waste disposal industry shift toward recycling. In contrast, the collections business is highly fragmented and competitive with minimal barriers to entry, albeit with a steady growth profile and diversified customer base.

Bingo operates in a highly regulated industry exposed to significant environmental risks.  The waste management industry is subject to significant and growing environmental and workplace safety regulations, which poses both risks and opportunities to the group. Recycling and disposal of hazardous and nonhazardous waste relies heavily on effective risk management systems, operating processes, and governance controls to minimize environmental risks. Managing these risks will pose ongoing challenges for Bingo as it continues its strong growth. We expect, however, that as the company's scale, geographic reach, and recycling capability continues to grow, its capacity to manage these risks should continue to strengthen relative to smaller, less well-capitalized competitors.

Bingo has limited geographic and end-market diversity.  Bingo has a strong and well-established market presence in Sydney and a nascent market presence in Melbourne. In our opinion, Bingo's narrow end-market exposure exposes it to cyclical property and infrastructure volumes within the Sydney market. That said, we believe Bingo is well-positioned to benefit from favorable near-term industry dynamics. Moreover, we consider that the company's existing network of assets provides it with a strong platform to grow its presence in Melbourne and gradually expand its footprint across the east coast of Australia over the medium term.

Future profitability will be heavily influenced by the successful commissioning of Bingo's new materials processing center (MPC2).  We believe this facility is important to Bingo's future competitive advantage and profitability. The fully automated MPC2 facility should reduce Bingo's exposure to landfill levies due to expected high recovery rates and lower labor intensity. Successful commissioning should also provide Bingo with a competitive advantage in the Sydney market. While MPC2 employs proven and tested processes and technologies, we believe the combination of these processes and technologies together in a single facility in Australia at this scale is untested. That said, we view execution risks associated with the commissioning of this large project as manageable, particularly given existing adjacent recycling capacity.

Bingo has a limited track record operating with its current business composition.  The company has grown rapidly, both organically and inorganically. We regard Bingo's capital expenditure (capex) over the past few years as high relative to its scale, resulting in sustained negative free operating cash flow. Moreover, we anticipate that return on capital will track in the low-to-mid single digit range in the next two years. Bingo's rapid growth makes it difficult to accurately assess its underlying profitability. Nevertheless, our base-case operating scenario incorporates our expectation that the company will substantially realize its growth objectives over the next two to three years.

We consider Bingo's adjusted debt-to-EBITDA ratio post transaction will be approximately 8x, reducing to around 6x in fiscal 2022 (ending June 30, 2022) and below 5x in fiscal 2023.  Our assessment of Bingo's debt includes senior secured debt, leases, remediation obligations and earn-out payments. We do not net off cash against debt, as we expect the group to deploy cash over time in pursuing its growth objectives. The rate of deleveraging will depend on a number of factors, including future growth initiatives, achieving improved pricing post COVID, successful commissioning of MPC2, and establishing facilities at Patons Lane. Our base case assumes that no dividends are paid to shareholders in the next two years.

Growth ambitions will likely weigh on free cash generation.  Bingo has a significant forward capex profile. This includes land acquisition for the proposed ecology park in fiscal 2022, which will be funded from available cash. The business is yet to demonstrate a track record of free operating cash flow due to investments in growth capex and acquisitions. We believe that Bingo's deleveraging profile is contingent upon prudent management of its growth objectives as it looks to build its presence across Australia's eastern states.

We view MIRA as a strategic owner.  MIRA has entered into a scheme implementation deed with Bingo Industries Ltd. to acquire 100% of Bingo Industries' share capital for a purchase consideration of A$2.6 billion. This includes a combined equity contribution of A$2.035 billion comprising A$1,626 million new sponsor equity and A$409 million rolled management equity. We do not anticipate that the owners will pursue shareholder returns until a greater degree of scale and geographic diversity is achieved.

Outlook

The stable outlook reflects our expectation that Bingo will maintain debt to EBITDA within a range of 5x to 6x over the next two years as the business increases in scale, operational capability, and geographic diversity.

Upside scenario

Upward rating pressure could occur if we forecast debt to EBITDA to be sustainably less than 5x and see evidence of improving free operating cash flow generation. This would most likely arise from improving profitability--including the successful ramp-up of MPC2--that limits the impact of growth initiatives on the group's cash flow generation and leverage.

Upward rating pressure could also arise from a material increase in the scale and diversity of the group's operations that improves the size and quality of the group's cash flow.

Downside scenario

We could lower the rating if we forecast Bingo to maintain debt to EBITDA above 7x, either as a result of debt-funded growth or a material erosion in the company's revenue growth or profitability. The latter could occur from a material decline in residential and commercial construction activity, aggressive competitor activity, protracted operational difficulties in its recycling operations, or higher regulatory and compliance costs.

Company Description

Bingo provides waste management solutions primarily for the residential and commercial construction and infrastructure markets in Australia. It operates through three segments: Collections, Post Collections, and TORO (manufacture and sale of bins). It collects and transports building, demolition, industrial, and commercial waste from customers to post collection facilities; and provides bins for hire.

The company diverts waste from landfill by sorting and processing mixed waste received from customers to be reused, recycled, or sent to other facilities for further processing; and manufactures and supplies bins. It operates through a network of 10 facilities in New South Wales (NSW) and five facilities in Victoria; and a truck fleet of approximately 330 trucks in NSW and Victoria.

MIRA has entered into a scheme implementation deed with Bingo to acquire 100% of the share capital of Bingo. Daniel Tartak (CEO) and Ian Malouf (nonexecutive director) have publicly announced that they intend to roll 60% of their equity into the post-acquisition company.

Our Base-Case Scenario

Assumptions

• Australia GDP growth of 4.0% in 2021 and growth of 3.3% in 2022;
• Australia Consumer Price Index growth of 1.6% in 2021 and growth of 1.8% in 2022;
• Revenues to decline in the low- to mid-single-digit percentage range in fiscal 2021 due to market disruptions associated with COVID-19, before growing 15%-20% in 2022;
• Adjusted EBITDA margins to contract to 27%-28% in fiscal 2021 (30% in 2019) mainly due to declining volumes and price discounting implemented to maintain volumes through the COVID-19 period. Adjusted EBITDA margins are then expected to recover to above 30% in 2022;
• Annual capex of around A$100 million to A$180 million in fiscals 2021 and 2022;
• Negative free operating cash flow over the next two years;
• No shareholder returns over the next two years; and
• Cash on balance sheet is not netted against debt.

Key metrics

Based on these assumptions, we arrive at the following adjusted credit measures for fiscals 2022 and 2023:

• Adjusted debt-to-EBITDA ratio of about 6x in 2022, declining below 5x in fiscal 2023.
• Ratio of funds from operations (FFO) to debt between 10% and 13%; and
• Negative ratio of free operating cash flow to debt.

Liquidity

We assess Bingo's liquidity as adequate, reflecting our expectation that the company's liquidity sources will cover its uses by more than 1.2x over the 12 months ending June 30, 2022. We expect net sources and uses of liquidity to remain positive even if EBITDA were to decline 15%.

Bingo's debt issuance into the TLB markets will be the first TLB issuance for the group. Assuming the proposed debt issuance is completed as proposed, the company will have no significant debt maturities until 2028, when its revolver and first-lien term loan matures.

Post recapitalization, we expect Bingo to have the following sources and uses of liquidity for the 12 months ended June 30, 2022:

Principal liquidity sources

• Initial balance sheet cash of approximately A$145 million;
• Delayed-draw term loan of $100 million and A$75 million revolving credit facility;
• Modest working capital inflows; and
• Our expectation of annual cash FFO of between A$100 million-A$110 million.

Principal liquidity uses

• No debt maturities:
• Capex between A$160 million to A$180 million (including land acquisition);
• Debt amortization of $3.0 million; and
• We assume dividends will not be paid.

Covenants

• Proposed financial covenants on the revolving credit facility include a springing first lien net leverage ratio of 6.75x.
• The TLB and delayed-draw term loan have no proposed financial covenants.
• We expect Bingo to remain compliant with its covenants with potential headroom building in fiscal 2022 and beyond as the business deleverages.

Issue Ratings - Recovery Analysis

Key analytical factors

• The preliminary 'B' issue ratings on Bingo's proposed A$825 million TLB facilities and A$100 million first-lien delayed-draw facilities are in line with the issuer credit rating on the company. The '3' recovery rating reflects our expectation of meaningful recovery prospects (50%) should a payment default event occur.
• The facilities will be secured by a first ranking security interest over substantially all the assets of the group and benefit from guarantees from all material group subsidiaries. Guarantors must represent greater than or equal to 80% of the consolidated assets and EBITDA of the group.
• Our simulated default scenario considers a payment default in the first half of 2023 due to economic weakness that leads to declining waste volumes, along with intensified competition that pressures Bingo Industries' margins and cash flow. In this scenario, Bingo Industries is unable to service its financial obligations, prompting the need for its restructuring as a going concern.
• We value the company on a going-concern basis using a 6x multiple to our projected post-default emergence EBITDA of $97.2 million, in line with similar rated peers within the environmental services sector.
• The company's A$1 billion senior secured credit facility comprises A$825 million first-lien term loan, A$100 million first lien delayed draw capex facility (undrawn as of fiscal 2021) and $75 million revolver facility (undrawn as of fiscal 2021).

Simulated default assumptions

• Year of default: 2023
• Jurisdiction: Australia
• Emergence EBITDA: $97.2 million
• Multiple: 6x
• Administrative claims of 5% of enterprise value
• An 85% draw under the revolving credit facility at default
• 100% draw of the delayed draw capex facility

Simplified waterfall

• Net enterprise value (after 5% administrative costs): $554.0 million
• Estimated first-lien debt claim: $995.3 million
• Recovery range: 50%-70% (rounded estimate: 50%)
• Recovery rating: 3
• Remaining value available for unsecured claims: No Claim
• Estimated unsecured claim: No claim
• Note: All debt amounts include six months of prepetition interest.

Ratings Score Snapshot

Issuer Credit Rating: B/Stable

Business risk: Weak

• Country risk: Very Low
• Industry risk: Low
• Competitive position: Weak

Financial risk: Highly Leveraged

• Cash flow/Leverage: Highly Leveraged

Anchor: b

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Management and governance: Fair (no impact)
• Comparable rating analysis: Neutral (no impact)

Stand-alone credit profile: b

Related Criteria

• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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