Fitch Rates Waste Management's New Notes 'BBB'

Fitch Ratings has assigned a rating of 'BBB' to the new senior unsecured notes issued by Waste Management, Inc. (NYSE:WM). The notes have a principal amount of $600 million, carry a coupon of 6.125% and mature in 2039. The new notes contain a change of control provision that requires WM to offer to repurchase the notes at 101% of par (plus any accrued and unpaid interest) if, following a change of control (as defined in the prospectus supplement), the notes' ratings from two rating agencies fall below investment grade. Proceeds from the new notes will be used primarily to fund acquisitions and strategic investments, with remaining proceeds used for general corporate purposes. Fitch rates WM's Issuer Default Rating (IDR) 'BBB'. The Rating Outlook is Stable.

WM's ratings reflect the waste services company's financial flexibility and free cash flow generation potential despite a recession-driven decline in collection and disposal volumes. Industry waste volumes have declined materially over the past year, but WM's core yield and EBITDA margin have grown as the industry has remained disciplined on pricing. The relatively variable cost structure of WM's collection operations and additional expense savings from a February 2009 corporate restructuring have also helped to support the company's margins. Over the past 18 months, WM has increased its focus on acquisitions, and earlier this year, the company resumed its share repurchase program, after stopping the program in July 2008. Although the addition of the new notes will increase WM's leverage slightly, Fitch expects that the company's credit profile will remain consistent with its 'BBB' ratings over at least the intermediate term. However, any significant follow-on debt issuances, other than for refinancing, could increase leverage to a level sufficient to warrant a revision in the Rating Outlook to Negative or a downgrade in the ratings.

With WM's strategic focus on acquisitions, particularly in new lines of business that complement its existing service offerings and 'tuck-in' opportunities in its core collection and disposal operations, the company announced earlier this year that it planned to spend up to a total of $650 million on solid waste acquisitions, medical waste acquisitions and waste-to-energy (WTE) investments through mid-2010. However, in the first three quarters of 2009, there were fewer acquisition opportunities than expected, and acquisition spending, which comprised $450 million of the $650 million total, is now expected to fall below plan. Spending on WTE investments will offset a portion of this shortfall in acquisition spending, however, as the company's Wheelabrator Technologies unit plans to invest approximately $140 million in a joint venture in China pending Chinese government approval, and the unit has a $150 million bid outstanding to purchase another WTE facility in the southeastern U.S. Acquisition spending also could increase over the next six to eight months as prolonged weakness in the U.S. economy causes the number of motivated sellers to rise. Fitch expects that these acquisitions generally will be relatively small, however, with most running significantly less than $50 million. WM noted in the prospectus supplement accompanying the new notes that the company plans to spend $350 million on acquisitions and strategic investments over the next six months, which includes the bid for the WTE plant in the Southeast.

Although Fitch could revise WM's Rating Outlook to Positive in the intermediate term if the company uses free cash flow to reduce its leverage, the addition of the new notes to the company's capital structure, as well as the company's plans to direct the majority of its free cash flow toward acquisitions and share repurchases, reduces the likelihood of such a change. On the other hand, WM's Rating Outlook could be revised to Negative in the next 12 to 18 months if, as noted above, the company increases its leverage materially with further debt issuances or if it experiences a significant further decline in volumes and pricing that results in a weakening of its credit profile.

Additional information is available at www.fitchratings.com.

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