Investing.com -- S&P Global Ratings has revised its outlook for Pennsylvania-based industrial recycling and environmental resource management provider, Enviri Corp., to negative from stable. This follows weaker than anticipated operating performance in 2024 and potential near-term demand pressure in some of its key markets, which could maintain its high leverage over the next year. The company's 'B+' issuer credit rating, however, has been affirmed.

Enviri Corp. has been experiencing free operating cash flow (FOCF) deficits for several consecutive years. Its future cash generation is dependent on the progress of several unfavorable contracts in its Rail segment. The company's $500 million first-lien term loan due 2028, with $483 million outstanding as of December 31, 2024, maintains a 'BB-' issue level rating. The company's $475 million senior unsecured notes due 2027 also maintain a 'B' issue level rating. The recovery ratings for both remain '2' and '5', respectively.

The negative outlook reflects the possibility of a downgrade for Enviri if its operating performance continues to weaken, leading to negative FOCF and elevated leverage above 5x over the next 12 months. This outlook also considers the company's persistently negative FOCF generation, lower volumes in the Harsco (NYSE: NVRI ) Environmental segment, and limited headroom under its recently amended covenants.

In 2024, Enviri reported a total sales decline of about 1% compared to 2023, due to the impact of two divested businesses and modest foreign currency headwinds. This was despite higher service contract and hazardous waste removal services volumes. For 2025, a softness in Enviri’s Environmental segment is expected due to muted U.S. metal production volumes. However, this is likely to be offset by strength in its Clean Earth segment and a moderate turnaround in the Rail segment, leading to relatively flat organic revenue growth, excluding the impact of recent divestitures.

Enviri's ability to generate positive cash flows is contingent upon the successful completion of several contracts in its engineered to order (ETO) business. The company reclassified its Rail segment back into continuing operations in the first quarter of 2024 and started a strategic plan to improve the profitability of this segment by completing or exiting unfavorable contracts. However, due to the upfront costs associated with ETO orders, Rail will continue to be a material drag on the total company’s margin profile. Failure to complete contracts in a timely manner could affect the company’s ability to generate positive FOCF.

S&P Global Ratings-adjusted leverage is expected to improve to the high-4x area over the next 12 months, although it will still be higher than the previous forecast. This is due to the company's 2024 EBITDA contraction of about 320 basis points from 2023, including a one-time $27.2 million charge for an environmental matter, leading to leverage of about 5.3x. In 2025, margins are expected to rebound to the 15% area as Enviri begins to improve its cost structure in Rail and one-time costs roll off, partially offset by higher selling and labor costs.

On February 14, 2025, Enviri amended its maximum net leverage ratio (MNLR) and its minimum interest coverage covenants to provide greater headroom as it navigates operations over the next 12 months. The MNLR provides a step-up to 5.0x in the second and third quarter of 2025 before stepping down to 4.75x in the fourth quarter and ultimately to 4.0x by June of 2027. The minimum interest coverage ratio was amended to 2.5x from 3.0x for the duration of the revolving credit facility (RCF).

Under S&P's base case forecast, Enviri is expected to remain in compliance with its covenants. However, EBITDA headroom could be slightly less than 15% over the next 12 months. If the company underperforms or is unsuccessful in obtaining further amendments, its covenants could pressure liquidity.

S&P could lower its rating on Enviri if the company fails to generate positive FOCF, its S&P Global Ratings-adjusted debt leverage remains above 5x, or EBITDA headroom under its covenants falls below 10%. The outlook could be revised back to stable if Enviri generates moderately positive FOCF on a sustained basis, reduces its S&P Global Ratings-adjusted leverage below 5x and sustains it at this level, and maintains a cushion under its covenants of at least 15%.

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