Rating Action: Moody's downgrades Harsco's ratings, including CFR to B1; outlook remains negativeGlobal Credit Research - 31 Aug 2022New York, August 31, 2022 -- Moody's Investors Service ("Moody's") downgraded the ratings of Harsco Corporation (Harsco), including the corporate family rating (CFR) to B1 from Ba3, probability of default rating to B1-PD from Ba3-PD, senior secured debt to Ba3 from Ba2 and senior unsecured notes to B3 from B1. The outlook remains negative. Additionally, the SGL-3 speculative grade liquidity rating is unchanged. The downgrades reflect expectations for weaker near-term results following continued under-performance relative to Moody's previous expectations, exacerbated by inflationary pressures and supply chain delays that will likely continue into 2023. This has led the company to revise down its earnings guidance for fiscal 2022. Leverage has remained high since the debt financed acquisition of the Environmental Solutions business (ESOL) of Stericycle, Inc. in April 2020. Moody's adjusted debt-to-EBITDA will likely approach 7x for fiscal 2022 -- roughly 6.4x pro forma for the rail business EBITDA (classified as discontinued operations) -- and will remain high even with expected improvement in 2023. The adjusted debt to EBITDA includes Moody's standard adjustments for pension and leases and outstanding securitization debt, which was $120 million at June 30, 2022.Governance risk was a key consideration in the rating action, with Moody's view that risks associated with the company's execution of its transition to a pure focus on environmental solutions have resulted in a financial policy that has led to higher leverage for an extended period of time. Therefore, Moody's has changed the ESG governance issuer profile score to G-4 from G-3 and the CIS score to CIS-4 from CIS-3.Moody's notes the company faces the risk of losses on certain key European rail contracts, for which it has recorded forward loss provisions related to estimated contractual damages and penalties for delayed deliveries mainly due to supply chain issues. While Harsco is negotiating with the customers to reduce the liabilities, this has slowed the sales process for the rail business (along with moderating economic growth), the proceeds of which Harsco has stated would be used to pay down debt.Moody's took the following actions for Harsco Corporation:Downgrades:..Issuer: Harsco Corporation.... Corporate Family Rating, Downgraded to B1 from Ba3.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD.... Senior Secured 1st Lien Term Loan B3 due 2028, Downgraded to Ba3 (LGD3) from Ba2 (LGD2).... Senior Secured Revolving Credit Facility due 2026, Downgraded to Ba3 (LGD3) from Ba2 (LGD2) .... Gtd Senior Unsecured Notes due 2027, Downgraded to B3 (LGD5) from B1 (LGD5) Outlook Actions: ..Issuer: Harsco Corporation ....Outlook remains negative RATINGS RATIONALE The ratings reflect Harsco's high leverage and cyclical exposure in its Harsco Environmental (HE) segment where sales are largely correlated with steel production volumes and affected by prolonged slowdowns in steel mill production or excess production capacity. HE is facing some volume weakness in Europe amid high energy costs and supply constraints from the effects of the Russia-Ukraine military conflict, although tempered by higher volumes in other regions. The planned divestiture of the rail business will result in the loss of revenue scale, diversification and a business with good longer term cash flow prospects. Cost inflation, labor and supply chain disruptions will exert margin pressures in the continuing operations (i.e. the environmental businesses) likely into 2023. The company has implemented unprecedented price increases, cost reductions and efficiency initiatives to offset the inflationary pressures. Moody's expects these actions to support margin improvement in 2023, although still lagging pre-pandemic levels. The ratings also reflect Harsco's longstanding customer relationships, evidenced in its sizeable order backlog and services under contract that provide revenue visibility. The company operates in fragmented markets for its environmental services but is well positioned considering high barriers to entry and its diversification by region, end market and customer base. Demand for services is partly driven by the need for customers to comply with environmental waste regulations. The backlog and demand fundamentals, including new contract wins at HE and recurring waste volumes at Clean Earth, should drive moderate top line growth over the next year. Moody's expects the revenue growth, along with higher pricing and ongoing cost and efficiency measures, to support EBITDA growth in 2023 and reduce leverage towards 6x (about 5x pro forma for rail).The Ba3 rating on the senior secured bank credit facility, one notch above the B1 CFR, reflects the loss absorption provided by the unsecured debt in the capital structure. The B3 rating on the unsecured notes, two notches below the CFR, reflects the significant amount of secured debt in the capital structure and the junior status of the unsecured notes in priority of claim, in a default scenario.The negative outlook reflects execution risks amid challenging operating conditions with cost inflation, continuing supply chain disruptions and slowing global economic growth. It also reflects Harsco's limited cushion to absorb any additional debt or earnings underperformance at the current rating level.Moody's expects Harsco to have adequate liquidity over the next year, as reflected by the SGL-3 speculative grade liquidity rating. This incorporates unrestricted cash of $97 million at June 30, 2022 and Moody's expectations of ample revolver availability and positive free cash flow in 2023 after sustaining negative free cash flow in recent years. As well, there are no near term debt maturities other than scheduled amortization of $5 million. The $700 million revolving facility, expiring in 2026, had $329 million available at June 30, 2022. Moody's also expects the company to maintain compliance with its covenants. The company has recently amended its covenants, mainly for relief on the previous step downs. The amendment requires net leverage to stay below 5.5x until Q4 2023 and step down thereafter (versus quarterly step downs of 0.25x to a floor of 4.0x in Q4 2023). The interest coverage requirement was lowered to 2.75x from 3x.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded with good execution demonstrated by consistent top line growth and meaningfully stronger metrics. This includes adjusted debt-to-EBITDA sustained below 4x, adjusted EBIT- to-interest expense at or above 2x and EBIT margin above 6.5%. The maintenance of good liquidity, including consistent positive free cash generation and ample covenant headroom, would also be required for an upgrade.The ratings could be downgraded with expectation of adjusted debt-to-EBITDA to remain above 5x (pro forma with rail EBITDA) and deteriorating EBIT-to-interest expense or margins beyond 2022, due to execution challenges or weakening business fundamentals. A ratings downgrade could also occur should the company experience any deterioration in liquidity. A meaningful increase in expected losses related to continued delays on delivering under key European rail contracts would also drive downwards rating pressure.The principal methodology used in these ratings was Environmental Services and Waste Management Companies published in April 2018 and available at https://ratings.moodys.com/api/rmc-documents/54482. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Harsco Corporation, headquartered in Philadelphia, PA, is a global provider of environmental solutions for industrial and specialty waste streams through the Harsco Environmental and Clean Earth business segments, and innovative equipment and technology for the rail sector. The company accounts for the rail business, which it plans to sell by year end 2022, as discontinued operations. 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