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Covanta vs CenturyLink financing and more ?3

12:45 10-Dec-19


Covanta has announced revolving securitization of up to $100M receivables.  This effectively allows bridge funding for the company's U.K. projects and should ease pressure on the dividend, the next instance of which should be announced any day now.  Although this represents an additional cost, to the extent that it is used, it is vastly preferable to other forms of debt.  Per the 8-K, the annual rate on receivables sold is just 1%, whereas according to the latest 10-Q Covanta's Revolving Credit Facility has $278M borrowed and $393M unused at 4.39% interest. 

For further comparison Covanta's term loan due 2023 incurs is at 4.35% and CenturyLink just had to refinance with unappealing 5.125% 7-year bonds.  In my mind this speaks to the high quality of Covanta's income more powerfully than the current market pressure that it is seeing.  If that pressure were to continue for years, then we could see a dividend cut in 2022, but new projects and changing markets should more than alleviate the situation well before then.  Consequently, I still favor the almost 7% yield on CVA over an anemic dividend increase that doesn't even keep AES at 3%.  CVA hasn't moved on this event, but I will update again once we get the next dividend announcement, as I think both that and the U.K. election results on the night of 12th could give the stock a little upward push.  The election is also more relevant to CUI, than another 20K CEO purchase at this point, but that's not saying much.

In my opinion, the market should be much more worried about the trade wars.  China's 3-5-2 directive is only for government offices, but the pace of local hardware and software sourcing over its 3-year horizon is aggressive, though with good reason.  Migration of this policy to China's private sector will take a bit longer, but I think we can be sure that it is coming.  There are even better reasons for Europe's growing insistence on carbon taxes, despite the potential for even more troubling rifts.  Fortunately for Nokia, 5G rollout from the likes of Vodafone is worldwide, and the U.S. has limited options.