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Rating Action:

Moody's downgrades Carriage Services CFR to B2, sr uns to B3; outlook stable

05 Dec 2019

$400 million of rated debt

New York, December 05, 2019 -- Moody's Investors Service ("Moody's") downgraded Carriage Services, Inc.'s ("Carriage" and "Carriage Services") corporate family rating ("CFR") to B2 from B1, probability of default rating ("PDR") to B2-PD from B1-PD and senior unsecured rating to B3 from B2. The Speculative Grade Liquidity rating was revised to SGL-3 from SGL-2. The outlook was revised to stable from negative.

Carriage announced it would expand its 6.625% senior unsecured notes due 2026 by $75 million to $400 million from $325 million and its unrated senior secured revolving credit facility due 2023 by $25 million to $175 million from $150 million. The net proceeds of the note expansion and revolving credit facility loans will be used to finance the purchase of several funeral and cemetery properties for about $175 million and pay related fees and expenses.

RATINGS RATIONALE

"Carriage Service's substantial financial leverage increase to well above 6 times following the announced exclusively debt-funded acquisitions and the introduction of integration risks from multiple acquisitions completed in close succession drive the rating downgrades," said Edmond DeForest, Moody's Vice President and Senior Credit Officer.

The B2 CFR reflects Carriage's small scale with 2020 revenue of less than $350 million anticipated and high pro-forma debt to EBITDA of about 6.5 times as of September 30, 2019. Free cash flow generation and interest coverage are solid, with free cash flow to debt of about 5% and EBITA to interest expense of about 2 times expected over the next 12 to 18 months. The ratings also reflect the fragmented and competitive deathcare industry dynamics with larger and smaller competitors which could create pricing pressures or limit revenue growth. Moody's expects declining average revenue per service, a trend in the funeral industry for the past several years, to continue to pressure Carriage's ability to grow same-store revenue. The ongoing secular trends toward the increasing use of cremation services, which often generate lower revenue than traditional burial and funeral services, could also weigh on financial performance or impede revenue and profit growth over time.

All financial metrics cited reflect Moody's standard adjustments.

The ratings are supported by Carriage's established position as the third largest player in the fairly stable deathcare industry, with solid profitability reflected in EBITDA margins in excess of 25%. The value of select Carriage assets, including its diverse set of owned and controlled funeral and cemetery properties and a backlog of already-sold pre-need funeral and cemetery contracts, is likely greater than the amount of select liabilities, including its costs to perform under its contracted pre-need service contracts and its debt. Favorable demographic trends include an aging US population and expectations for higher death rates over the next several years.

The downgrade to B3 from B2 of the rating assigned to the senior unsecured notes reflects the B2-PD PDR and a Loss Given Default Assessment of LGD4. The B3 instrument rating also reflects the senior notes' junior position in the debt capital structure behind the unrated senior secured revolving credit facility.

The revision of the Speculative Grade Liquidity rating to SGL-3 (adequate) from SGL-2 (good) reflects limitations on the effective availability of funds from Carriage's unrated $175 million senior secured revolver due 2023 due to financial covenants. The total leverage ratio (as defined in the debt agreement) was 4.9 times as of September 30, 2019. Pro forma for the additional debt and acquired EBITDA, the company estimates the ratio would have been 5.7 times. The ratio must be no more than 6.0 times as of December 31, 2019, 5.75 times for the first three fiscal quarters of 2020 and 5.5 times as of December 31, 2020 and thereafter. While $56 million will be available notionally under the revolver pro forma for the acquisitions and financing, Moody's anticipates the maximum total leverage ratio covenant will effectively limit the amount of available incremental debt to less than $25 million until Carriage reports substantial EBITDA growth or debt repayment. Liquidity support is also provided by Moody's expectations for free cash flow of at least $25 million.

The stable outlook reflects Moody's expectations for low single digit organic revenue growth, debt to EBITDA to decline from both EBITDA expansion and debt repayment and adequate liquidity. The outlook also anticipates Carriage will continue to pursue debt-financed acquisitions.

The ratings could be downgraded if: 1) revenue or margins decline, indicating a weakening competitive position, 2) financial policies become more aggressive such that Moody's expects debt to EBITDA will be sustained above 6.5 times or 3) liquidity deteriorates.

The ratings could be upgraded if revenue scale is expanded and Moody's anticipates sustained organic revenue and profit rate growth. Expectations that Carriage would sustain debt to EBITDA below 5.5 times, good liquidity and balanced financial policies, and free cash flow to debt would approach 8% are also important considerations for any positive ratings momentum.

Moody's took the following actions on Carriage Services, Inc.'s ratings:

Downgrades:

..Issuer: Carriage Services, Inc.

.... Corporate Family Rating, Downgraded to B2 from B1

.... Probability of Default Rating, Downgraded to B2-PD from B1-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

....Gtd Senior Unsecured Notes, Downgraded to B3 (LGD4) from B2 (LGD4)

Outlook Actions:

..Issuer: Carriage Services, Inc.

....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.

Carriage, headquartered in Houston, Texas, is a public company which provides funeral and cemetery services and merchandise in the US. As of September 30, 2019, Carriage operates 182 funeral homes in 29 states and 29 cemeteries in 11 states across the US. Moody's expects over $300 million in revenue 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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