Upon the heels of a very profitable quarter and yearly report of funeral and cemetery consolidator Carriage Services, Moody’s Investor Services last week raised the credit rating of the company as you can see in this article here. A better credit rating should drive down borrowing costs for Carriage Services and, according to the Year End 2020 Annual report, Carriage Services management is counting on that to lower cash outlays for those needs.
It’s also very interesting as to what one can find out about how a credit ratings company such as Moody’s looks at the death care profession by what they say in the ratings press release.
In the release Moody’s is upgrading Carriage Services corporate family rating (CFR) from a B2 to a B1 rating. Here’s an excerpt from the Moody release about Carriage Services:
“Despite uncertainty about 2021 organic revenue growth due to the coronavirus pandemic, which we view as a social risk under our ESG framework, we expect Carriage to continue improving its funeral market share and successfully integrate its recent acquisitions, resulting in continued margin expansion. Today’s action also reflects governance considerations, specifically a less aggressive financial policy evidenced by Carriage’s nearly 14% debt reduction through fiscal year 2020. . . ”
In addition, here are some snippets from the release that not only give Moody’s reflection on Carriage Services, but in many ways, gives an indication of how they look at the death care business community as well:
- The ratings also reflect the fragmented and competitive death care 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.
- The coronavirus pandemic caused a spike in deaths in 2020 and likely will in the first half of 2021 as well, which is benefitting Carriage’s performance.
- Though there is uncertainty about death rates in the aftermath of the pandemic, Carriage is supported by demographic trends that include an aging US population and the expectation for higher death rates over the medium term.
It has been somewhat apparent to us at Funeral Director Daily that Carriage Services, for the past six months or so, has been expecting a better credit rating. As you may know, they have $400 million in 6.625% unsecured senior notes that have a callable date of June 1, 2021. In their latest earnings press release which you can read here, they have been talking about refinancing those notes, at a premium on that date, and expect to save about 2.5% on the note’s coupon rate, which when included with the premium paid to call the notes, will result in about a $9-10 million dollar annual savings. Here is what their recent earnings press release says about this situation:
“Based on the current trading price and yield of our outstanding bonds, the continued low interest rate environment and the strength of the high
yield bond market, we expect to refinance the $400 million of notes with a new 8-10 year unsecured senior notes issue with
a coupon approximately 250 basis points lower than our current rate. This planned transaction would be immediately
accretive to annual earnings per share by $.34-$.38 and would substantially increase annual Adjusted Free Cash Flow by
reducing cash interest expense by $9-$10 million.”
Funeral Director Daily take: This is not an unusual happening in corporate America. And, we include this article today simply to point out to our family owned funeral home and other death care business operators that there is, from time to time, lots of places to squeeze out extra profits in your operations. Just like Carriage Services recent operational business and profits has given it a more favorable market position with financing, your own business may be in the same boat and it may make sense to visit with your banker about your possibilities to lower finance costs going forward.
In Carriage Services’ case on this item, they estimate the premium price to call the notes at this time to be about $20 million. However, if they will save $9-10 million annually on the new lower interest rates, it is only a two year payback and years 3-10 of the new notes generate $10 million annually. . . . that is a $80 million cash savings just for the trouble of re-setting the notes. . . Not a bad deal.
The money in re-financing can add up even for small operators. If you have a $500,000 building mortgage. . . .a savings of 1.5% on annual interest will be equal to $7,500 per year or $75,000 over ten years that you can keep instead of giving to the bank. Don’t overlook these opportunities.
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