Covanta Holding (CVA) to Refinance Debt, Lowers Capital Costs

Covanta Holding Corporation CVA has entered into a loan agreement with the National Finance Authority (New Hampshire) to issue $129.4 million in new tax exempt bond (the Series 2020 bonds). These are subject to mandatory tender for purchase in 2040.

The Series 2020 bonds will carry a weighted average coupon rate of 3.71%. The proceeds will be used to refinance certain outstanding bonds, which were issued in 2015.

Comparison of Both Bonds

Bonds worth $39,405,000, priced for a coupon rate of 5%, will now be repaid through the proceeds of bonds bearing an interest rate of 3.625%. While the earlier Series 2015A bonds were due Jul 1, 2043, the current new Series 2020A (Non-AMT) will be due Jul 1, 2043.

Bonds worth $90,000,000, priced for a coupon rate of 5.25%, will now be repaid via the proceeds of bonds carrying an interest rate of 3.75%. While previously, bonds of Series 2015 were due Jul 1, 2045, the new Series 2020B (AMT) (Green Bonds) will now be due Jul 1, 2045.

Motive Behind the Act

The aim of the aforementioned transaction is to reduce the cost of financing. The refinancing will lower the weighted average coupon of the bonds by 145 basis points. Moreover, with the removal of the subsidiary guarantee, the leverage ratio of the company under the senior secured credit facilities on a pro forma basis will be lowered.

Remarkably, the deal will result in annual cash interest savings of more than $5 million.

Liquidity Concerns

The rising debt level remains a downside for Covanta Holding. Long-term debt amounted to $2,387 million at the end of second-quarter 2020 compared with $2,366 million as of Dec 31, 2019. Currently, the company’s total debt to total capital is pegged at 90.05%, comparing unfavorably with the industry average of 49.88%. Thus, refinancing certain debts to trim the interest amount will save the company’s financing costs.

Also, its times interest earned ratio stands at 0.73 in the June quarter, higher than 0.66 in the March quarter. Though the ratio increased in the second quarter, times interest earned ratio of less than 1 indicates that the company might find it difficult to meet its near-term debt obligations.

Peer Moves

Other companies from the same sector are also tapping this opportunity of near-zero interest ratesto procure debt at cheaper rates, to repay or refinance their debt obligations and also to lower their debt-servicing costs. Recently, Clearway Energy, Inc. CWEN, Bloom Energy Corporation BE and Linde plc LIN among others opted for refinancing their debts.

Zacks Rank & Price Performance

Currently, the stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The stock has gained 6.4%, underperforming the industry’s rise of 10% in the past three months.

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