S&P Affirms Ratings on ServiceMaster (SERV)

Standard & Poor's Ratings Services said that its ratings on Memphis-based The ServiceMaster Co. LLC (NYSE: SERV), including the 'B' corporate credit rating, 'B+' issue-level rating on the company's senior secured credit facility, and 'B-' issue-level rating on the company's senior unsecured notes, are unchanged following the proposed $175 million incremental first-lien term debt issuance. The transaction would have identical terms to the existing outstanding term debt. Our '2' recovery rating on the senior secured credit facility, reflecting substantial recovery (on the high end of the 70%-90% range) expectations for the lenders in case of payment default, is also unchanged. Our '5' recovery rating on the senior unsecured notes, reflecting modest recovery (10%-30%) expectations, is also unchanged.

We expect the company to use proceeds from this transaction, together with on-balance sheet cash, to redeem its remaining $200 million of 8% senior notes due 2020. As a result of the proposed transaction and recent debt pay-down, we estimate pro forma adjusted leverage decreases to the mid-5x area, from about 6x for the year-ended Dec. 31, 2014. We expect credit metrics will remain in line with indicative ratios for the "highly leveraged" financial profile, including leverage above 5x and funds from operations to total debt less than 12%, over the next year through increased operating efficiency and profitability as a result of the recent TruGreen spin-off. While we expect the company will continue to grow through its American Home Shield and Terminix segments, the business risk profile remains "weak", given ServiceMaster's participation in fragmented and highly competitive businesses and its vulnerability to declines in economic conditions, particularly given the discretionary nature of commercial and consumer spending for its services.

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