Service Corporation International (SCI), a funeral care public company and a component of the Funeral Director Daily Death Care Index (DCI), on Tuesday announced a new debt arrangement moving forward.  The company announced that it has priced an underwritten public offering of $550 million Senior Notes due in 2027.  The notes have been priced at 4.625%.  The offering is being underwritten and J.P. Morgan is the lead underwriter.  Part of this issue will be used by SCI to retire approximately $250 million of its 7.625% Senior Notes due in 2018.

SCI also announced a $1.675 billion unsecured credit agreement maturing in 2022.  This agreement calls for a $1 billion revolving credit facility and a $675 million term loan.  You can read a press release of this announcement here.

Ratings agency Moody’s has put a Ba3 rating on the Senior Notes and listed the outlook as Stable with expectations for modest revenue growth and steady credit metrics over the next 12 to 18 months for SCI.  Moody’s also mentioned the following in regards to the totality of the debt arrangement:

• Expected SCI revenue growth in the low single digits
• An expectation of Debt to EBITDA for the company to remain around 4:1
• Revenue growth will be driven by preneed cemetery production
• Revenue growth will be hampered by pressured at-need funeral volume and average price
• Upgrades to the debt could occur if profitable revenue growth of 4% is gained and/or Debt to EBITDA could be lowered to 3:1
• Ratings could be lowered if there is declining revenue and/or Debt to EBITDA rises to 4.5:1
• Moody’s expects SCI to be an “opportunistic” acquirer of cemetery and funeral properties going forward

You can read the Moody report here.

Funeral Director Daily take:  I always enjoy reading about these things, especially the Moody’s take.  Even though the numbers have a lot of zeros behind them and are much more than we work with in our individual funeral home businesses, there is much to glean and learn for the individual operator in these reports.

For instance, Moody’s seems pretty comfortable with a Debt to EBITDA ration of 4:1.  For the small operator that means that – although there are a lot of other variables including personal asset collateral – if you have an EBITDA (basically free cash-flow) of $200,000 then a bank would probably be comfortable with a loan of about $800,000 to you.  You can see how this plays out in purchases of funeral homes when, for instance, a seller wants 6 times EBITDA for a business and the bank will only be comfortable at the 4 times number.  That’s the crunch that keeps a lot of good people from being able to own their own funeral home.

I also find it interesting that Moody’s is somewhat counting on the cemetery operations to really carry SCI in the scope of “pressure” on funeral volume and pricing.  You can read “less funerals and more immediate cremations” into that code.  Moody’s understand the business — a difference between SCI and individual operators is that SCI has a “cemetery” business whereas most small funeral operators don’t.

An interesting thing where this arrangement really helps SCI is that they are replacing $250 million of current notes that they are paying at a rate of 7.625% now with a new rate of 4.625%.  That equates into a $7.5 million interest savings annually.  My opinion is that with the economy seemingly humming along and Janet Yellen leaving the Federal Reserve, is that we are poised for interest rate upticks next year so to get debt re-done at lower rates is smart at this time.  That goes for individual operators too. . . might be a good time to talk to your banker and restructure to save money.

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