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Rating Action:

Moody's affirms StoneMor CFR at Caa2, assigns Caa2 rating to sr sec notes; outlook revised to stable

25 Sep 2019

$385 million of debt rated

New York, September 25, 2019 -- Moody's Investors Service ("Moody's") affirmed StoneMor Partners L.P.'s ("StoneMor") Corporate Family rating ("CFR") at Caa2 and Probability of Default rating ("PDR") at Caa3-PD. Moody's assigned a Caa2 rating to its senior secured notes due 2024. The Speculative Grade Liquidity rating was upgraded to SGL-3 from SGL-4. The ratings outlook was revised to stable from negative.

On June 27, 2019, StoneMor announced it had closed a $447.5 million recapitalization transaction, consisting of $62.5 million of preferred units (equity) and $385.0 million of 9.875%/11.500% senior secured PIK toggle notes due 2024. The proceeds were used to repay fully the senior unsecured notes due 2021 and retire the revolving credit facility expiring in May 2020, as well as for associated transaction expenses, cash collateralization of existing letters of credit and other needs formerly secured by the revolving credit facility, with the balance available for general corporate purposes. Investors in the preferred units included affiliates of investment management firm Axar Capital Management LP ("Axar").

RATINGS RATIONALE

"We expect StoneMor's revenue will decline in 2019, leading to the affirmation of the CFR at Caa2," said Edmond DeForest, Moody's Senior Credit Officer. DeForest continued: "Since the Axar-led recapitalization provides the company with time and liquidity to implement its business strategy changes, including over $30 million of planned annual cost reduction initiatives, thereby reducing the risk of a default in the next 12 to 24 months, we also revised the rating outlook to stable from negative."

The Caa2 CFR reflects Moody's concern that StoneMor's disappointing operating performance could be slow to improve. Weak financial metrics include expectation for very high financial leverage as measured by debt to Accrual EBITDA (pro forma for acquisitions, reflecting Moody's standard adjustments and adding deferred revenues less deferred expenses) which will remain over 10 times, interest coverage below 1.0 time and free cash flow negative in 2019. Moody's anticipates that revenue will grow and free cash flow will be slightly positive by the end of 2020, driven by stabilizing pre-need and at-need cemetery and funeral contract sales and the completion of in-process selling and operational improvements and cost reduction initiatives. The rating is supported by a national portfolio of cemetery properties and an over $900 million backlog of pre-need cemetery and funeral sales.

StoneMor exhibits modest environmental risks associated with its large physical property portfolio. Some social and reputational risks stem from periodic, although infrequent, complaints and lawsuits regarding mishandling of human remains at some of its sites. There are multiple governance and regulatory considerations, which vary by location, regarding the handling of human remains and with respect to the management of financial assets held in trust from prepaid contracts. StoneMor's overall operating and financial strategies are considered evolving following the Axar-led recapitalization in June. A change to more aggressive capital allocation, governance or financial strategies could pressure ratings.

The Caa3-PD PDR reflects Moody's anticipation of a higher than average overall recovery at default given StoneMor's debt capital structure, which features one set of secured creditors with tight financial covenants that could lead to a rapid default if its operating and financial performance do not improve.

The Caa2 rating on the senior secured notes reflects the Caa3-PD PDR and an LGD assessment of LGD3, reflecting its senior position in Moody's priority of claims at default relative to unsecured trade creditors. The secured notes are secured by all assets of StoneMor and are guaranteed on a secured basis by all of its material operating subsidiaries.

The upgrade of the Speculative Grade Liquidity rating to SGL-3 from SGL-4 reflects an adequate liquidity profile with over $40 million of unrestricted cash as of June 30, 2019. Moody's expects negative $10 million to negative $15 million of free cash flow (cash burn) in 2019. The senior secured notes pay quarterly interest at either a fixed rate of 9.875% per annum in cash or, at StoneMor's periodic option through January 30, 2022, a fixed rate of 7.50% per annum in cash plus a fixed rate of 4.00% per annum payable in kind. Moody's anticipates StoneMor will select the PIK option until its operating and financial performance improves, reducing the cash burden from interest expense. The senior secured notes includes certain financial covenants with which StoneMor may not comply if financial performance continues to decline. These include minimum operating cash flow (as defined) of no less than $20 million in the last two quarters of fiscal 2019 and a minimum Consolidated Interest Coverage Ratio (as defined) of 0.4 times for the nine months ending with the first fiscal quarter of 2020, stepping up to 0.75 times for the twelve months ending with the second quarter, 1.0 times for the LTM ending with the third fiscal quarter and 1.15 times for fiscal 2020, with further steps up in 2021.

The stable ratings outlook reflects Moody's expectations for a slowly improving operating and financial performance and adequate liquidity while StoneMor executes its turn-around plan.

The ratings could be upgraded if Moody's anticipates sustained 1) pre-need cemetery bookings growth, 2) debt to Accrual EBITDA below 8 times and 3) positive free cash flow.

The ratings could be downgraded if 1) operating and financial results do not improve, 2) the value of StoneMor's assets, including its preneed cemetery sales backlog, declines or 3) liquidity deteriorates.

..Issuer: StoneMor Partners L.P.

.... Corporate Family Rating, Affirmed Caa2

.... Probability of Default Rating, Affirmed Caa3-PD

....Senior Secured, Assigned Caa2 (LGD3)

.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4

....Outlook, Changed To Stable From Negative

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

StoneMor, based in Trevose, PA, is a provider of funeral and cemetery products and services in the United States. As of June 30, 2019, StoneMor operated 321 cemeteries and 90 funeral homes in the US and Puerto Rico. The company owns 291 of these cemeteries and operates the remaining 30 under long-term management agreements with non-profit cemetery corporations that own the cemeteries. StoneMor is organized as a master limited partnership (MLP) and is treated as a partnership for U.S. federal income taxes. StoneMor and its operating subsidiary, StoneMor Operating LLC, pay no federal taxes at the entity level and are not subject to a material amount of entity-level taxation by individual states. StoneMor expects to convert from an MLP to a C Corporation by early 2020. Moody's expects StoneMor will book GAAP revenues of over $300 million in 2020.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edmond DeForest
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Karen Nickerson
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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