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Investing.com -- Moody’s Ratings has upgraded the corporate family rating (CFR) of GFL Environmental Inc. (NYSE:GFL) from B1 to Ba2, citing significant debt reduction and enhanced operating cash flow. The rating agency also upgraded GFL’s probability of default rating, senior secured notes, and bank credit facility ratings. The outlook for GFL remains stable.
Moody’s Vice President - Senior Analyst, Dion Bate, attributed the upgrade to the company’s decreased financial leverage, which allows GFL to continue its acquisition strategy with less reliance on additional debt. The ratings upgrade concludes a review initiated on January 9, 2025, following the disposal of a 56% stake in GFL Environmental Services LP (ES) on March 3, 2025, to Apollo and BC Partners.
The net cash proceeds of C$6.2 billion from the stake sale will be used to repay approximately C$3.7 billion in outstanding debt under the revolver, term loan, and senior secured notes due in 2025 and 2026. This will remove all near-term refinancing risk. The company also plans to use C$2.25 billion for share buybacks. Following these debt repayments, the respective instrument ratings will be withdrawn.
The ratings upgrade reflects improved financial leverage after debt reduction. Moody’s forecasts that pro forma debt/EBITDA for FY 2024 will decrease to about 4.3x from 5.3x pre-transaction, and it is expected to fall below 4x in 2025. For 2025, Moody’s expects organic revenue to grow mid-single digits, driven by price increases, steady volume growth, RNG projects, EPR contracts, and acquisitions.
GFL’s strategy to pursue acquisitions of up to C$900 million with capex of up to $750 million and growth investments of C$325 million in 2025 will impact cash flow. However, this will be partially offset by improved operating cash flow primarily from the lower interest expense, reducing GFL’s reliance on additional debt.
GFL’s rating benefits from its growing and diversified business, high recurring revenue supported by long term contracts and stricter regulation, its good market position in the stable Canadian and US nonhazardous waste industry, and growing EBITDA margins. However, the rating is constrained by its history of aggressive debt financed acquisition growth, the short time frame between acquisitions, and private equity and founder ownership.
GFL has good liquidity, with sources totaling around C$2.0 billion and no mandatory debt payments over the next 12 months. Post the transaction, GFL has proforma cash of around C$380 million, full availability under its C$1.3 billion revolving credit facilities, and an expectation of around C$300 million of free cash flow in 2025.
The stable outlook reflects Moody’s expectation that GFL will operate within their newly stated capital allocation policy and with lower financial leverage such that adjusted debt/EBITDA will trend below 4x over the next 12-18 months.
Ratings could be upgraded if GFL continues to deliver solid operating performance with EBITDA margins sustained above 25% and demonstrates a commitment to maintain a more conservative and predictable financial policy. Conversely, ratings could be downgraded if liquidity weakens, or if there is a material and sustained decline in operating margin due to challenges integrating acquisitions.
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