TEXT-S&P rates Service Corp International notes 'BB-'

Wed Nov 7, 2012 3:43pm EST

Related Topics

Nov 7 - Overview
     -- Houston-based funeral and cemetery service provider Service Corp. 
International (SCI) is issuing $200 million senior unsecured notes due
2020. The company will use proceeds to redeem its $181 million 2014 notes.
     -- Our 'BB' corporate credit rating remains unchanged. We are assigning 
the new senior unsecured notes a 'BB-' issue-level rating with a recovery 
rating of '5'.
     -- Our stable rating outlook reflects our expectation that SCI will 
maintain credit metrics that support a "significant" financial risk profile 
with adjusted debt leverage ranging from 3.5x to 4x.

Rating Action

As Standard & Poor's previously stated, on Nov. 5, 2012, Standard & Poor's 
Ratings Services said its 'BB' corporate credit rating on Service Corp. 
International remains unchanged. The outlook is stable.

At the same time, we assigned SCI's proposed $200 million senior unsecured 
notes our 'BB-' (one notch below the 'BB' corporate credit rating) issue-level 
rating with a recovery rating of '5', indicating our expectation for modest 
(10% to 30%) recovery for noteholders in the event of a payment default.

Rationale
Our ratings on SCI incorporate the company's "fair" business risk profile, 
characterized by a narrow focus in the mature, competitive death-care 
industry, as well as the company's "significant" financial risk profile that 
reflects our expectation for leverage of about 3.7x in 2012 and 2013. We 
expect low-single-digit revenue growth and EBITDA margins above 23% in 2012 
and 2013. SCI is the largest provider of death-care products and services in 
North America.

Our 2012 and 2013 base-case assumptions incorporate limited volume-driven 
opportunities within the company's at-need funeral business, primarily due to 
enhancing product offerings in cremation. SCI's cremation rate is over 40% of 
total funeral revenues; we expect it to increase 1% annually. Cremation 
provides substantially lower revenue per contract, but produces higher 
margins. We expect flat revenues in its traditional funeral business because 
of ongoing death-rate trends. We expect revenue growth primarily will come 
from market-share gains through acquisitions and from accelerated delivery of 
cemetery merchandise from the growing preneed cemetery backlog. For the same 
reasons, we expect higher EBITDA margins of 23% to be maintained. We expect 
SCI's preneed backlog of about $7 billion to continue benefiting from its 
sales force investment. 

We also expect SCI to continue generating well over $200 million of free 
operating cash flow in both 2012 and 2013. We expect SCI will continue using 
free cash flow to fund both acquisitions and share repurchases. We do not 
expect debt repayment to be a priority during this period. 

SCI's "significant" financial risk profile reflects our expectation for 
moderate EBITDA expansion, primarily stemming from acquisitive growth. Absent 
any debt repayment or additional debt needs, we believe debt outstanding will 
remain level. In our view, this would result in leverage between 3.5x and 4x 
and funds from operations to debt between 15% and 20% in 2012 and 2013.

SCI's "fair" business risk profile reflects the company's leading position in 
a fragmented competitive field, demonstrated by its large size (over 1,400 
funeral homes and 380 cemeteries throughout North America), which affords it 
scale efficiencies. With more than $2 billion in annual sales (68% from 
funeral services and merchandise and the rest related to cemetery properties), 
SCI is by far the nation's largest cemetery and funeral home operator. 
However, it currently captures only about 13% of the funeral and cemetery 
market and faces a few smaller national and many smaller regional competitors. 
The second largest competitor, Stewart Enterprises Inc., is less than 
one-quarter of SCI's size.

While SCI's business risk profile reflects its leading position, it also 
reflects the inherent risks of operating in the mature death-care industry, 
which holds limited growth prospects. Currently, death rates have declined, 
attributable to a mild winter and better preventive care. Lack of organic 
growth increases pressure to pursue acquisitions. Additionally, there is an 
industry shift in consumer preference for lower-cost cremation services 
compared with traditional burials, pressuring revenue expansion. However, over 
the longer term, the industry benefits from an aging baby boomer population, 
which should eventually support higher death rates.

Liquidity
We view SCI's liquidity as adequate, with sources of cash exceeding mandatory 
uses over the next year. Our assessment of SCI's liquidity profile 
incorporates the following expectations and assumptions:
     -- We expect sources of liquidity over the next 12 months to exceed uses 
by at least 3x. 
     -- Sources of liquidity are supported by our expectation of about $350 
million of operating cash flow, $152 million of cash on hand, and $390 million 
available under its $500 million revolver as of Sept. 30, 2012. 
     -- Uses include about $115 million of capital expenditures and annual 
dividend of about $45 million.
     -- We expect liquidity sources to exceed uses even if EBITDA declines by 
15%, but there may be limited ability to absorb a high-impact, low-probability 
event.
     -- We expect the absence of covenant step-downs to keep SCI's cushion on 
its debt covenants adequate at above 20%. 
     -- SCI's sizable investments in trust funds derived from customer 
receipts for preneed funeral and cemetery services and merchandise remain 
subject to market volatility and can affect overall liquidity. 
     -- SCI's ability to accelerate delivery of some preneed 
services/merchandise to release cash from its trusts is included in our 
assessment of liquidity.
     -- There are no significant debt maturities until 2015. 
 

Recovery analysis
The issue-level rating on SCI's proposed $200 million senior unsecured notes 
is 'BB-' (one notch below the 'BB' corporate credit rating). The recovery 
rating is '5', indicating our expectation for modest (10% to 30%) recovery for 
noteholders in the event of a payment default.



Outlook
Our stable rating outlook reflects our expectation that SCI will maintain 
credit metrics that support a significant financial risk profile as it pursues 
acquisitions to offset slow organic growth. We also view the company's narrow 
business focus in a fragmented market as a fundamental business characteristic 
precluding any upside revision of our "fair" business risk profile, limiting 
prospects for a rating upgrade in the near term. Moreover, we do not expect a 
meaningful reduction in financial leverage due to our expectation that the 
company will use free cash flow to fund strategic acquisitions and share 
repurchases instead of debt repayment.

Given the nature of the business, we do not expect a sharp decline in 
profitability. However, a rating downgrade is possible if SCI pursues a 
sizable debt-financed acquisition that causes adjusted leverage to increase 
above 5x, indicative of a "highly leveraged" financial risk profile. A squeeze 
in bank-calculated EBITDA by more than 10%, resulting in tight covenant 
cushions below 10%, could also lead to a rating downgrade.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List

Service Corp. International
 Corporate Credit Rating                BB/Stable/--

New Rating Assigned
Service Corp. International

$200 Mil. Senior Unsec. Notes Due 2020  BB-
  Recovery Rating                       5  
                             


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