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Covanta refinancing and follow-up ?2

17:07 21-Aug-18


Covanta has refinanced its credit facilities.  The major difference is that the new term means that the company now has no material maturities before 2022.  Pursuant to this morning's note, what I also find interesting is what this might be saying about the American rate outlook.  The prior debt facilities were indexed to the higher of the Fed Funds rate plus half a percent or LIBOR plus 1%.  The new facilities are simply LIBOR plus 2%.  Though the important here is surely the added time, one has to wonder if there's not also some thought about decoupling of the two rates.

In any case, the market is clearly coming the conclusion that I had long ago about the sustainability of Covanta's business model.  I see this as a transformational period in which the company morphs from an American company to a global one.  That doesn't mean there aren't opportunities in America though.  Despite federal policy becoming progressively more insane, which could wind up being problematic for NRG Yield and AES Corp., local realities still assert themselves.  A little more emphasis on the recent deal in Florida serves as an example of that.  The contracts that Covanta is taking over there generate about $60M annually, and run through 2029 and 2035.  So, it's pretty clear that Babcock's incompetence is Covanta's gain.  

How U.S. policy evolves and how long the global transformation takes are key to valuing the company.  Without further partnerships CVA is probably somewhat overvalued, as we've already seen how slow and painful the process of going it alone can be.  The added time given by this refinancing could be taken as a negative, but the simplification it brings maintains room for other possibilities.