(The following statement was released by the rating agency.)
-- 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 unitholder distributions.
-- Furthermore, the increased size of StoneMor's secured credit facility reduces prospects for recovery on the company's unsecured debt in the event of payment default.
-- 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 STON.O L.P. on CreditWatch, with negative implications. 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 accounting methods. 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 downgrade. 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 (New York Ratings team) (email: Harold.Barnett@thomsonreuters.com; Reuters messaging: harold.barnett.thomsonreuters.net; Tel: +1-646-223-4186))