Lending to the Solid Waste Disposal Industry

By Wallace, Joseph B. | Journal of Commercial Lending, June 1993 | Go to article overview

Lending to the Solid Waste Disposal Industry


Wallace, Joseph B., Journal of Commercial Lending


The solid waste disposal industry may seem to be an unattractive source of lending opportunities for bankers; its borrowers represent a line of business that is far from the most glamorous industry that can seek bank financing, and a host of environmental concerns surround these operations. However, borrowers in the solid waste disposal industry do need funds to keep their businesses going, and lenders should not reject loan applications from these borrowers merely because there are complex issues involved. A well-managed, well-structured loan to a borrower from the solid waste disposal industry can prove to be very valuable to a banker if the risks are understood, a requirement with which this article should help.

Background

Solid waste disposal is a $25-billion industry, and the industry is expected to grow at 20% to 25% per year. Landfills, supplied by general curbside collection, remain the dominant disposal site of solid waste in the U.S., despite strong public opposition to the expansion and development of landfill space in many communities.

According to a study conducted for the Environmental Protection Agency (EPA), landfills will be the final destination for more than 70% of the U.S. solid waste stream by the year 2000. This percentage represents 137 million tons of solid waste annually.

In the latter 1980s, recycling in various forms emerged as the most socially acceptable alternative to solid waste burial at a landfill. But, while curbside recycling programs have become a significant factor in the solid waste equation, a substantial portion of the waste stream must continue to use landfills. In addition, some markets for recycled products remain generally weak, thereby ensuring a continued need for landfills.

Industry Trends

The solid waste disposal industry historically has been characterized by two trends that remain prevalent in the current market: consolidation and privatization.

Consolidation. Although the leading companies in the solid waste disposal industry have pursued aggressive consolidation programs over the past two decades, the industry remains significantly fragmented. The largest solid waste companies control less than 25% of total industry revenues, which translates into continued acquisition opportunities for well-financed and aggressive companies.

For commercial bankers, this trend creates opportunities for substantial financing of company buyouts and debt restructurings. However, to reduce the risks in financing these transactions, a lender should be familiar with the industry and with the financing recommendations that are designed primarily to reduce environmental liability.

Privatization. A trend of increasing significance is the ongoing privatization of landfill ownership and operation. Municipalities are finding the capital needs and compliance issues surrounding landfill operations to be increasingly burdensome. Therefore, as communities look to have their solid waste disposal needs met elsewhere, the privatization opportunities are substantial. Opportunities exist as approximately 3,300 of the nation's 5,800 operating landfills are owned by municipalities.

Major Participants

The industry is dominated by a few large hauling and collection companies centered in the Midwest, including:

* Waste Management, Inc., Hinsdale, Ill.

* Browning-Ferris Industries, Inc., Houston.

* D&D, Inc., Baraboo, Wis.

* Groot Industries, Elk Grove Village, Ill.

* Hoving & Sons, Chicago.

* National Scavenger Services, Chicago.

* Speelman Refuse, Chicago.

* TOP Disposal, Fort Wayne, Ind.

These major participants in the industry are what remain of several dozen hauling firms operating only a few years ago; the dwindling number is the result of acquisitions and consolidations through the years.

However, lenders expecting to glean lending opportunities from industry consolidation--in the form of funds for buyouts--are apt to be disappointed. …

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