Rating Action Overview
- Weaker construction activity over the next two years is likely to hamper Recycle and Resource Operations Pty Ltd.'s (Bingo's) growth prospects and deleveraging efforts. We expect EBITDA margin to remain close to 20% over the next two years owing to higher fuel, transport, and labor costs.
- We anticipate that S&P Global Ratings-adjusted debt to EBITDA will remain above 8x for fiscal 2023 (year ending June 2023) and above 7x for fiscal 2024.
- On June 26, 2023, we affirmed our 'B' issuer credit rating on Bingo, and revised our outlook on the long-term issuer credit rating to negative from stable. At the same time, we affirmed the 'B' issue credit rating on the group's term-loan B (TLB) facilities.
- The negative outlook reflects our view that building and construction sector woes are likely to constrain Bingo's operating performance and EBITDA margins. The company's leverage is likely to remain elevated such that S&P Global Ratings-adjusted debt to EBITDA will remain above 7x over the next two years.
Rating Action Rationale
Challenging conditions for the construction sector are likely to weigh on Bingo's collection volumes. Residential construction is likely to decline over the next two years whereas large infrastructure projects may see marginal growth. There remains some risk to growth in major infrastructure project volumes based on economic conditions and government finances. With muted volume growth over the next one to two years, Bingo will depend more on pricing increases and margin improvement to support earnings growth and balance sheet deleveraging.
Higher costs and rising interest rates are hampering earnings growth. EBITDA margins improved during fiscal 2023 as collection volumes rebounded from a COVID- and weather-affected fiscal 2022. Price increases helped to temper the impact of higher fuel and labor costs. We expect S&P Global Ratings-adjusted EBITDA margin of about 18% for fiscal 2023, with further incremental increases to the low 20% range over the next two years. Continued but gradual operational improvement of Bingo's new materials processing center (MPC2) should help increase overall margins. Additionally, rising interest costs over the next 12 months on Bingo's 46% unhedged portion of debt will pressure free operating cash flow.
Liquidity should remain adequate in the coming 12 months. Cash on hand of A$100 million as of March 31, 2023, and the undrawn A$75 million revolver provide liquidity support as free operating cash flow improves. The potential exercise of the A$100 million Eastern Creek land option in December 2024 may see liquidity diminish if the anticipated improvement in internal cash flow generation does not occur. Bingo does have the ability to sell and lease back its property assets to assist with funding requirements, but the associated lease obligations will limit the credit benefit of such transactions.
Bingo's weaker-than-expected earnings recovery has slowed deleveraging efforts. We expect Bingo's free operating cash flow generation to be negative in fiscal 2023 as challenging operating conditions coincide with elevated capex levels and rising interest costs. As a result, deleveraging will be slower than we had anticipated, pressuring key credit measures. In this regard, we anticipate Bingo's leverage for fiscal 2023 will be about 8.3x. Allowing for mild revenue growth and modest margin improvement in fiscal 2024, leverage should improve toward the mid-7x range.
Outlook
The negative outlook reflects our expectation that challenging operating conditions and rising interest rates may cause Bingo's S&P Global Ratings-adjusted debt to EBITDA to remain above 7x in the next two years.
Downside scenario
We could lower the rating if we forecast Bingo to sustain S&P Global Ratings-adjusted debt-to-EBITDA above 7x from fiscal 2024 and negative free operating cash flow persists. This could occur if revenue growth slows, margin improvement stalls, or the company's revolving credit facility is drawn to support liquidity or to fund growth-related activities.
Upside scenario
We could revise the outlook to stable if we expect free operating cash flow to turn positive and S&P Global Ratings-adjusted debt-to-EBITDA to trend below 7x from fiscal 2024. This would most likely arise from robust volume growth or margin expansion--including ongoing improvement of MPC2--or other capital-management initiatives.
Company Description
Bingo provides waste management solutions primarily for the residential and commercial construction and infrastructure markets in Australia. Bingo operates in New South Wales (NSW) with a network of 10 facilities and Victoria and Queensland, each with five facilities. Bingo also has a truck fleet of approximately 390 trucks in NSW, Victoria, and Queensland.
The company operates through three segments:
- Collections: This segment collects and transports building, demolition, industrial, and commercial waste from customers to post-collection facilities and provides bins for hire.
- Post-collections: Recycling and landfilling where 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.
- TORO Waste Equipment and other: Manufacture and sale of bins.
Our Base-Case Scenario
Assumptions
- Australia GDP growth of 1.6% in 2023 and 1.7% in 2024;
- Australia consumer price index growth of 6.2% in 2023 and 3.9% in 2024;
- Revenue growth of about 45% for fiscal 2023 from volume recovery and price increases across the business. Further revenue growth of about 5%-10% in fiscal years 2024 and 2025;
- Operating costs to increase in line with inflation;
- Adjusted EBITDA margin recovering to slightly below 20% for fiscal 2023 and improving to the low 20% range for fiscal years 2024 and 2025;
- Annual capital expenditure of A$60million in fiscal years 2024 and 2025;
- Expected negative free operating cash flow in fiscal 2023 supported by cash reserves and the revolving credit facility (if required);
- No dividends paid; and
- Cash on balance sheet not netted against debt.
Key Metrics
Table 1
| Recycle and Resource Operations Pty Ltd.--Forecast summary | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Industry sector: Environmental services | ||||||||||||||||
| --Fiscal year ended Jun. 30-- | ||||||||||||||||
| (Mil. A$) | 2019a | 2020a | 2021a | 2022a | 2023e | 2024f | 2025f | |||||||||
| Revenue | 396 | 479 | 471 | 444 | 640 | 675 | 726 | |||||||||
| EBITDA (reported) | 72 | 143 | 109 | 25 | 119 | 135 | 150 | |||||||||
| Plus: Operating lease adjustment (OLA) rent | 4 | -- | -- | -- | -- | -- | -- | |||||||||
| Plus/(less): Other | 1 | 3 | 2 | 25 | -- | -- | -- | |||||||||
| EBITDA | 77 | 146 | 111 | 50 | 119 | 135 | 150 | |||||||||
| Less: Cash interest paid | -7 | -18 | -16 | -40 | -63 | -64 | -65 | |||||||||
| Less: Cash taxes paid | -22 | -21 | -18 | -11 | -- | -- | -- | |||||||||
| Funds from operations (FFO) | 48 | 107 | 77 | -0 | 56 | 71 | 85 | |||||||||
| Share repurchases (reported) | 7 | 9 | -- | -- | -- | -- | -- | |||||||||
| Debt (reported) | 313 | 364 | 357 | 2,028 | 2,081 | 2,180 | 2,241 | |||||||||
| Plus: Lease liabilities debt | 17 | 43 | 44 | 64 | 68 | 68 | 68 | |||||||||
| Plus/(less): Other | 44 | 19 | 19 | -1,091 | -1,154 | -1,219 | -1,289 | |||||||||
| Debt | 374 | 425 | 420 | 1,000 | 995 | 1,029 | 1,019 | |||||||||
| Equity | 826 | 859 | 853 | 782 | 656 | 581 | 517 | |||||||||
| FOCF (adjusted for lease capex) | -154 | -86 | -4 | -198 | -80 | 3 | 17 | |||||||||
| Cash and short-term investments (reported) | 39 | 57 | 43 | 181 | 60 | 50 | 52 | |||||||||
| Adjusted ratios | ||||||||||||||||
| Debt/EBITDA (x) | 4.9 | 2.9 | 3.8 | 19.9 | 8.3 | 7.6 | 6.8 | |||||||||
| FFO/debt (%) | 12.9 | 25.2 | 18.2 | (0.0) | 5.7 | 6.9 | 8.4 | |||||||||
| Lease capex-adjusted FOCF/debt (%) | (41.1) | (20.3) | (1.1) | (19.8) | (8.1) | 0.3 | 1.7 | |||||||||
| Return on capital (%) | 4.4 | 6.6 | 3.2 | (1.8) | 2.3 | 3.4 | 4.4 | |||||||||
| Return on total assets (%) | 4.0 | 6.0 | 2.8 | (1.2) | 1.2 | 1.7 | 2.2 | |||||||||
| EBIT interest coverage (x) | 3.9 | 5.3 | 2.7 | (0.5) | 0.6 | 0.9 | 1.1 | |||||||||
| Debt/debt and equity (%) | 31.2 | 33.1 | 33.0 | 56.1 | 60.3 | 63.9 | 66.3 | |||||||||
| Debt fixed-charge coverage (x) | 7.8 | 9.5 | 7.4 | 0.9 | 1.6 | 1.8 | 2.0 | |||||||||
| Debt/debt and undepreciated equity (%) | 31.2 | 33.1 | 33.0 | 56.1 | 60.3 | 63.9 | 66.3 | |||||||||
| a--Actual. e--Estimate. f--Forecast. All figures are adjusted by S&P Global Ratings, unless stated as reported. | ||||||||||||||||
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 coming 12 months. We expect net sources and uses of liquidity to remain positive even if EBITDA were to decline 15%.
During fiscal 2025 we expect liquidity sources to be closer to 1x uses depending on whether Bingo exercises the A$100 million land option for an ecology park. If Bingo exercises the option, it may have to access its revolving credit facility (currently undrawn).
Principal Liquidity Sources (as of March 31, 2023):
- Cash and cash equivalents of approximately A$101 million;
- About A$75 million of undrawn revolving credit facility; and
- Cash FFO between A$50 million and A$55 million over next 12 months.
Principal Liquidity Uses (as of March 31, 2023):
- Debt amortization of about A$9.3 million;
- Working capital outflows of about A$2.5 million to A$3 million;
- Minimum capex of about A$60 million; and
- Penalty payment in Australian Competition & Consumer Commission price-fixing case of up to A$40 million.
Covenants
Requirements
- Financial covenants on the revolving credit facility (RCF), when drawn, include a springing first lien net leverage ratio of 6.75x.
- The TLB and delayed-draw term loan have no financial covenants.
Environmental, Social, And Governance
ESG credit indicators: E-2, S-2, G-3
Issue Ratings - Recovery Analysis
Key analytical factors
The 'B' issue ratings on Bingo's 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 (55%) should a payment default event occur.
The facilities are 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 2025 due to economic weakness that leads to declining waste volumes, along with intensified competition that pressures Bingo's margins and cash flow. In this scenario, Bingo 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 $101 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, and $75 million revolving credit facility (undrawn as of fiscal 2022).
Simulated default assumptions
- Year of default: 2025.
- Jurisdiction: Australia.
- Emergence EBITDA: A$101 million.
- Multiple: 6x
- Administrative claims of 5% of enterprise value.
- An 85% draw under the revolving credit facility at default.
Simplified waterfall
- Net enterprise value (after 5% administrative costs): A$575 million
- Estimated first-lien debt claim: A$997 million
- Recovery range: 50%-90% (rounded estimate: 55%)
- Recovery rating: 3
- Estimated unsecured claim: No claim
- Remaining value available for unsecured claims: No claim
Note: All debt amounts include six months of prepetition interest
Ratings Score Snapshot
| Issuer Credit Rating | B/Negative/-- |
|---|---|
| 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 |
| Capital structure | Neutral |
| Financial policy | Neutral |
| Liquidity | Adequate |
| Management and governance | Fair |
| Comparable rating analysis | Neutral |
| Stand-alone credit profile: | b |
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings , Oct. 10, 2021
- 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
Related Research
- Recycle and Resource Operations Pty Ltd.; Sept. 29, 2022
Ratings List
| Ratings Affirmed | ||
|---|---|---|
|
Recycle and Resource Operations Pty Ltd. |
||
| Senior Secured | B | |
| Ratings Affirmed; CreditWatch/Outlook Action | ||
| To | From | |
|
Recycle and Resource Operations Pty Ltd. |
||
| Issuer Credit Rating | B/Negative/-- | B/Stable/-- |
| Ratings Affirmed | ||
|
Recycle and Resource Operations Pty Ltd. |
||
| Senior Secured | ||
| AUD100 mil Delayed Draw Term Loan nts due 07/14/2028 | B | |
| Recovery Rating | 3(55%) | |
| AUD325 mil Term Loan B nts due 07/14/2028 | B | |
| Recovery Rating | 3(55%) | |
| US$375 mil nts | B | |
| Recovery Rating | 3(55%) | |
S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Richard Timbs, Sydney + 61 2 9255 9824; richard.timbs@spglobal.com |
| Secondary Contact: | Aldrin Ang, CFA, Melbourne + 61 3 9631 2006; aldrin.ang@spglobal.com |
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