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Streetwise GFL faces debt warning ahead of potential $1-billion IPO

An employee of GFL waste collection picks up recycling and compost in the neighbourhood of Sheppard Avenue and Dufferin Street in Toronto.

Deborah Baic/The Globe and Mail

GFL Environmental Inc.'s plans to launch a lucrative Canadian initial public offering, potentially worth $1-billion, was dealt another setback after a leading debt-rating agency warned about the company's leverage levels.

GFL, a waste-management company owned by private-equity backers, has been planning a large IPO for some time, and the expectation was that it would finally launch this March.

But early in February, a sudden resurgence of trading volatility put a damper on capital-markets activity, as investors grew cautious amid large daily market swings. As the equity markets started to calm, Moody's Investors Service changed its outlook on GFL's debt last week to negative from stable, after the company issued US$400-million worth of new notes.

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GFL's total debt burden, which now amounts to 6.4 times its earnings before interest, taxes, depreciation and amortization, is of particular concern to the rating agency. GFL continues to pursue acquisitions as it aims to consolidate the waste-management industry, and many of its deals are fuelled by debt.

"The negative outlook reflects Moody's concern with GFL's aggressive acquisition strategy which may mean that the company will not deliver below six times," the agency wrote in its rating review. Moody's is also concerned about GFL's ability to boost its cash flow to more than one times its annual interest payments.

Because Moody's did not announce a full downgrade of GFL's debt, it is unclear exactly how heavily the action will weigh on potential investors. However, the new outlook, coupled with unease about the equity markets, will likely take some steam out of the planned offering.

If investors are truly bothered by the recent changes, it could mean GFL will not be able to sell as many shares as it originally planned, or it may have to revise its pricing expectations.

Rating agency Standard & Poor's did not change its outlook for the company's debt after the latest note offering, but it agrees with Moody's that GFL's debt levels are likely to stay elevated for some time. S&P currently rates GFL's senior unsecured debt "B-", while Moody's rates the notes at B3. Both ratings are well below investment grade.

It is possible that a portion of GFL's IPO will come in the form of treasury shares, meaning some of the money raised will flow into the company's coffers – whereas the proceeds from secondary shares flow to the private-equity backers that sell down some of their holdings as part of the deal.

In its credit review, Moody's acknowledged the potential for an IPO, which might help pay down some debt, but ultimately said these plans couldn't yet be factored into its rating. "Since the company has not confirmed this piece of information [the IPO], we cannot incorporate IPO considerations in our assessment of the company at this time," the agency wrote.

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While a deal is widely expected, there are precedents where a private-equity-backed company had plans to go public but ultimately cancelled the transaction.

In 2012, energy-services giant Tervita Corp. – formerly CCS Income Trust – was hoping to go public in a deal that was reported to be worth as much as $1-billion. However, it never emerged, and in the year following all the IPO hype, Tervita's fortunes deteriorated rapidly, resulting in multiple debt downgrades. Its main problem has echoes with GFL's outlook: Too much debt.

In an e-mail, GFL chief executive officer Patrick Dovigi would not comment on an initial public offering, but he wrote that the latest debt offering was necessary because the company was closing three acquisitions and needed capital to do so. Because GFL is "well within our covenant package," he wrote, the company didn't "need to use equity [to fund the deals] given the high free cash profile of the business."

GFL last raised equity in the summer of 2017, when it sold $125-million worth of equity to institutional investors by way of a private placement. The deal gave GFL an enterprise value of $4.2-billion and the offering was widely seen as a pre-IPO financing.

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