Mike Read, head of waste at Grant Thornton UK LLP, gives a business banker’s view of the waste market, and predicts greater scrutiny from more informed funders in the future
CIWM Journal Online Exclusive
Operators in the UK waste management industry are facing a crucial turning point as the sector is fragmented and caught in the shift from landfill to recycling and recovery. This constitutes a significant change in the established waste collection business model from essentially logistics, to dealing with, in many cases, sophisticated technology and processes.
Waste businesses that have got access to established, long term sources of waste which can readily be recycled or where they can easily access thermal treatment capacity will be in the strongest position. That would suggest that the larger players will be better placed to make the transition than the plethora of local waste businesses that deal largely with skip hire and smaller commercial collections.
So what are the challenges these smaller businesses face and what will the companies’ bank manager be looking at.
Changes in landfill tax rules over recent years have meant significant increases in the cost of waste disposal for some materials. As part of the reclassification of soils, construction soil is now chargeable at the standard rate of £80 per tonne instead of the lower rate of £2.50 per tonne. These changes have had an adverse impact on skip hire companies, some of which have needed to change the way they invoice customers in an attempt to pass some of the increased costs on (ie by tonne of waste, not per skip).
Waste transfer stations, which produce finely shredded material that is desired by landfill sites to line and cover other waste, used to qualify for the lower rate of tax for such materials. The materials are now being charged at standard rate, increasing the cost to waste companies.
In theory, businesses further up the waste hierarchy should benefit from the move away from landfill. However like any global commodity, the recycled materials market has been impacted by global price trends and the material quality is vital to derive profitable revenues. As the average revenue derived from a tonne of recycled waste (including payments for the collection of the waste and subsequent sales of the recycled materials derived from it) have fallen, sales to China primarily of baled low quality plastic, such as that used in plastic bottles, have dropped as Chinese import policies have changed. As a direct result, skip hire companies and those operating waste transfer sites are facing an over supplied market place and many struggle to cover the taxes for landfill use.
What Is The Outcome Of The Above?
When combined with reduced household waste (as a result of reduced consumer spending) as well as commercial and industrial waste, the impact of landfill tax rises and a difficult recyclate (recycling output) market, these conditions have brought many smaller skip operators and waste businesses to breaking point.
So How Will The Bank Manager Look At This?
Funders will take time to carefully monitor the waste management businesses in their portfolios, and in particular their management teams, in order to understand how these businesses are responding to the challenging market conditions they are currently facing. This will enable secured lenders to stay abreast of potential problems as these are likely to be costly to address and can wipe out the value of any security.
The informed funders will be then considering the following:
- Companies with permits to operate waste transfer sites are likely to be monitored closely for compliance both in terms of quantity and the time period allowed for the waste to be removed. The Environment Agency has the power to issue enforcement notices and to suspend trading if an operator is found to be in breach of the permit. Suspended or limited trading can lead to serious cash flow problems in addition to significant clean up and remediation costs (over £100 per tonne). Waste transfer sites in breach of their permit may contain several thousand tonnes of waste, resulting in clean up charges of several hundred thousand pounds.
- Is the waste transfer site compliant in terms of the amount of waste stored and also in terms of its ‘churn’ time moving waste from the site to landfill/recycling?
- Are provisions for restoration/remediation adequate, do these need to be reviewed?
- Have management teams entered in to costly long-term contracts including the under estimation of costs and would they/are they facing challenges of re-negotiation?
- For multi-site operators, should the waste business undertake a review of the profitability of individual sites?
- Can the business cope with the increased balance sheet pressure for already highly leveraged businesses?
- With the need for businesses to diversify away from landfill, what capital investment is required, and where can that come from?
- What is the risk of insolvency from the challenging combinations of:
o reduced waste volumes and high fixed costs; and
o increased landfill taxes and lower sales being achieved from sales of recyclates, which result in reduced profitability
- Are the current facility terms under pressure as the financing structures date back to pre-recession, when the market was assessed in more favourable terms?
- What is the level of insurance in place to cover key risk such as fires?
So a lot of this may be viewed as what you would expect from a lender with an interest in the well-being of its corporate clients. Many waste companies have probably flown under the radar in the past as they have been good cash generative businesses that often ended up being swallowed up by the big players. That is a thing of the past particularly given the different banking market that exists post the credit crunch, so expect greater scrutiny from more informed funders will be the norm.
Mike Read is Head of Waste at Grant Thornton UK LLP