Moody's cuts Synagro, rates loan B2

Moody's Investors Service said it downgraded the ratings of Synagro Technologies Inc., including the $120 million guaranteed senior secured credit facility maturing in 2007 to B2 from B1, the $150 million 9.5% guaranteed senior subordinated notes due 2009 to Caa1 from B3, the senior implied rating to B2 from B1, and the senior unsecured issuer rating to B3 from B2 (non-guaranteed exposure).

Moody's also assigned a B2 rating to the new $305 million guaranteed senior secured credit facility maturing 2012.

The outlook is stable.

Proceeds from the proposed facility will finance a portion of the planned recapitalization of Synagro, which includes a secondary offering of about $148 million of common equity and the expected primary sale of about $30 million of common stock.

According to Moody's, the downgrade reflects management's higher financial risk tolerance as evidenced by the start of a cash dividend policy in advance of the accumulation of significant retained cash and the resulting negative impact to free cash flow of this policy. The downgrade also reflects Synagro's sizable debt-funded capital investment required to support its growing facilities business, deficit to breakeven free cash flow which is weak relative to its pro forma debt throughout the intermediate term, and the absence of meaningful improvement in operating margins.

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