Moody's Upgrades ServiceMaster (SERV) to 'Ba3'; Outlook Remains Positive
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Moody's Investors Service ("Moody's") upgraded The Servicemaster Company, LLC's (NYSE: SERV) Corporate Family rating ("CFR") to Ba3 from B1, the Probability of Default rating ("PDR") to Ba3-PD from B1-PD, senior secured bank debt to Ba3 from B1 and the senior unsecured to B2 from B3. The Speculative Grade Liquidity rating ("SGL") was affirmed at SGL-1. The ratings outlook remains positive.
Upgrades:
..Issuer: ServiceMaster Company, LLC (The)
.... Corporate Family Rating, Upgraded to Ba3 from B1
.... Probability of Default Rating, Upgraded to Ba3-PD from B1-PD
....Senior Secured Bank Credit Facility, Upgraded to Ba3 (LGD3) from B1 (LGD3)
..Issuer: ServiceMaster Company (The) (Old)
....Backed Senior Unsecured Regular Bond/Debenture, Upgraded to B2 (LGD6) from B3 (LGD6)
..Issuer: ServiceMaster Company LimitedPartnership(The)
....Backed Senior Unsecured Regular Bond/Debenture, Upgraded to B2 (LGD6) from B3 (LGD6)
Affirmations:
..Issuer: ServiceMaster Company, LLC (The)
.... Speculative Grade Liquidity Rating, Affirmed at SGL-1
Outlook:
..Issuer: ServiceMaster Company, LLC (The)
....Outlook, Remains Positive
RATINGS RATIONALE
ServiceMaster's Ba3 CFR reflects Moody's expectations for about 5% revenue growth, steady low 20s% EBITA margins and debt to EBITDA to decline to around 4 times by the end of 2017. ServiceMaster has solid market positions and scale in two business segments (pest control and home warranty policies). Customer retention rates of approaching 80% make revenues predictable. Revenues at the Terminix division are somewhat seasonal. Disciplined cost management, new products at Terminix, new contract sales at American Home Shield (AHS) and a history of steady price increases lead us to anticipate steady revenue growth. Investments in new product development, marketing and information technology could limit near-term profit margin and free cash flow expansion. Liquidity from over $200 million of cash, expectations of at least $300 million of free cash flow and at least $150 million available under the $300 million revolver is considered very good.
The positive ratings outlook reflects Moody's anticipation of accelerated profit and free cash flow growth driven by current infrastructure and information technology investments. The positive outlook also anticipates that further debt reduction may be slowed by acquisitions or shareholder returns. Higher ratings are possible if Moody's comes to expect: 1) debt to EBITDA will remain below 4 times; 2) free cash flow to debt above 12%; and 3) balanced financial policies. A downgrade is possible if Moody's comes to expect: 1) debt to EBITDA will remain above 5 times; 2) free cash flow to debt below 8%; or 3) more aggressive financial policies.
The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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