Fitch Affirms Synagro-Baltimore LLC's Rev Bonds at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed the 'BBB+' rating for Synagro-Baltimore LLC's (Synagro) $25.6 million ($8.375 million outstanding) tax-exempt series 2008 A revenue refunding bonds, which were issued on behalf of Synagro by the Maryland Industrial Development Financing Authority (MD). The Rating Outlook is Stable.

KEY RATING DRIVERS

Stable Revenue Profile: Synagro's cash flows are derived from fixed price service agreements with the city of Baltimore, a highly rated municipality. Synagro is not exposed to volumetric or price risks, as the agreements are structured as put-or-pay contracts with guaranteed minimum payments. The agreements provide substantial flexibility if a facility experiences an outage, and tipping fees are only reduced in extreme circumstances. Revenue Risk: Midrange

Low Operational Risk: The Synagro facilities incorporate a high degree of excess capacity with relatively simple and proven technology. The facilities have been in service almost continuously since beginning commercial operations and have an extensive combined operating history. In recent years, throughput has fallen well below the facilities' respective maximum capacities. The high proportion of reimbursable expenses under the service agreements limits the potential for higher O&M costs to impact cash flows, though management service fees may be charged to the project at the sponsor's discretion. Operation Risk: Midrange

Manageable Capital Expenditure Profile: Fitch does not anticipate that Synagro will incur non-routine maintenance costs prior to the maturity of the bonds, and the project is not required to make specific capital improvements under the service agreements. The capacity of the facilities appears sufficient to meet Synagro's contractual obligations with the repairs to the Patapsco facility complete. Infrastructure/Renewal Risk: Stronger

Standard Debt Structure: The senior secured, fixed-rate bonds fully amortize throughout the debt's tenor, reaching maturity in Dec. 2016. Bond holders benefit from a debt service reserve approximately equal to six months of debt service. Fitch expects debt service coverage ratios (DSCR) to remain level through the maturity of the debt. Debt Structure: Midrange

Steady Financial Performance: Synagro has historically maintained a stable cost profile that has combined with fixed contractual revenues to provide level operating margins. The projected level of financial performance is consistent with the current rating across Fitch's stress scenarios, including an extended outage at one of the facilities. The average DSCR is greater than 1.6x in a Fitch rating case that contemplates both higher expenses and reduced availability.

Parent Exposure: The rating is based on Synagro's stand-alone credit profile but is limited by potential exposure to the credit quality of Synagro Technologies Inc. (STI), Synagro's parent and a sub-investment grade entity. The potential risk of consolidation arising from the parent exposure concerns STI's administrative practices with respect to Synagro prior to the issuance of the bonds. STI and Synagro have since amended their relationship such that Synagro is organized as a bankruptcy-remote, special-purpose vehicle. Favorably, Synagro was not consolidated in STI's 2013 bankruptcy proceedings. Ownership & Sponsors: Weaker

RATING SENSITIVITIES

--Increasing operating costs: Greater than expected O&M expenses, capital expenditures or management fees.

--Parent financial distress: A further bankruptcy or financial distress at the STI level that leads to litigation by STI's creditors.

--Unfavorable regulation: More stringent biosolids regulation that results in higher compliance costs or capital expenditures.

SECURITY

The rated debt is secured by a pledge of revenues under the service agreements and a first mortgage lien on the assets, contracts, and project accounts.

CREDIT UPDATE

Synagro's recent financial and operating performance is consistent with prior periods. The facilities have generally performed well and continue to fulfill their obligations under the service agreements. Revenues continue to reflect guaranteed minimum contractual volumes, and sludge deliveries have fallen slightly below historical averages over the past two years. Synagro has held O&M costs relatively stable. The continued receipt of the guaranteed minimum level of revenue and the lack of extraordinary capital expenditures allowed Synagro to maintain DSCRs in excess of 2.0x in 2012 and through the first three quarters of 2013.

Technical risks have been moderated, as the Patapsco facility's utilization represents approximately 50% of total capacity based on current output levels. The Patapsco facility's second dryer train was repaired in March 2013 and has subsequently operated without incident. Synagro's management indicates that the repairs were entirely funded with $4.7 million of insurance proceeds. The replacement of the dryer train included safety upgrades designed to prevent a recurrence of the explosion that disabled it in 2010.

Fitch views favorably the sponsor's improved financial circumstances and the appointment of a new management team. EQT Infrastructure II (EQT), a European private equity infrastructure fund, purchased STI in August 2013 during STI's Chapter 11 bankruptcy proceeding. In April 2013, STI filed a voluntary petition for reorganization for the purpose of facilitating the sale to EQT. In August 2013, STI confirmed at the request of the project trustee that STI would recognize and abide by its obligations to Synagro's bond holders. Neither Synagro nor its project-financed affiliates were brought into bankruptcy by STI. Synagro's plan of reorganization became effective Aug. 22, 2013.

Synagro is a special-purpose company created to own and operate two sludge processing facilities that provide disposal services to the city of Baltimore under two service agreements expiring in 2014 and 2017. Baltimore has a contractual obligation to deliver a guaranteed minimum tonnage or pay service fees on the equivalent sludge volume. Synagro must process and/or dispose of all sludge delivered to the facility by the city.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance'(July 12, 2012);

--'Rating Criteria for Availability-Based Projects'(June 18, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Availability-Based Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710784

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818931

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Fitch Ratings
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Chicago, Illinois 60602
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Associate Director
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Saavan Gatfield, [phone]
Senior Director
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