-- Levittown, Pa.-based deathcare services provider StoneMor Partners
L.P. has not met our free operating cash flow expectations, which has
heightened the risk of the company's need to raise outside funds to make
-- Furthermore, the increased size of StoneMor's secured credit facility
reduces prospects for recovery on the company's unsecured debt in the event of
-- We are placing StoneMor's 'B' corporate credit rating on CreditWatch
with negative implications.
-- We are also lowering our issue-level rating on StoneMor Operating
LLC's $150 million senior unsecured notes to 'CCC+' from 'B-' and placing the
new rating on CreditWatch with negative implications.
NEW YORK (Standard & Poor's) Nov. 29, 2011--Standard & Poor's Ratings Services
said today that it placed its 'B' corporate credit rating on Levittown,
Pa.-based StoneMor Partners L.P. on CreditWatch, with negative
At the same time, we lowered our senior unsecured issue-level rating to 'CCC+'
(two notches below the corporate credit rating) from 'B-', and placed the new
rating on CreditWatch with negative implications. In addition, we revised our
recovery rating on the debt to '6' from '5'. The '6' recovery rating indicates
our current expectation for negligible (0% to 10%) recovery of principal in
the event of payment default, compared with our previous expectation of modest
(10% to 30%) recovery.
We do not rate StoneMor's secured credit facility.
"Our low speculative-grade ratings on StoneMor reflect the company's weak
business risk profile due to its concentration in the highly fragmented and
competitive cemetery services industry with limited (although somewhat
predictable) growth prospects offset by rising cremation rates," said Standard
& Poor's credit analyst Tahira Wright.
The company's highly leveraged financial risk profile takes into account its
master limited partnership (MLP) structure. As an MLP, StoneMor is expected to
distribute a high percent of earnings to unitholders. StoneMor routinely
relies on debt and new equity issuance to finance its acquisition strategy and
distributions to its unitholders. The tax-advantaged MLP structure favors
distributions rather than debt repayment. Consistently negative discretionary
cash flow and minimal headroom in the company's fixed-charge coverage loan
covenant contribute to our view that the company's liquidity is weak.
StoneMor's highly leveraged financial risk profile reflects debt to EBITDA
under GAAP over 8x as of Sept. 30, 2011. We expect the trend of funding
acquisitions with debt and moderating leverage through equity infusions to
persist. Debt to EBITDA under production-based accounting was 2.79x as of
Sept. 30, 2011. The company manages and their banks measure on a production
base, rather than GAAP, and reports selected financial results using both
The CreditWatch listing indicates we expect to lower the ratings unless we
conclude the trend of free operating cash flow over the longer term largely
eliminates StoneMor's use of debt to partially fund unitholder distributions.
We will assess the company's ability to internally generate more cash flow
relative to its cash outlays. Additionally, its slim cushion on its
fixed-charge covenant, if not alleviated, could also contribute to a
RELATED CRITERIA AND RESEARCH
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008