S&P Upgrades Service Corp (SCI) to 'BB+'; Sees Maintaining Financial Leverage at Appropriate Levels

Standard & Poor's Ratings Services today raised its corporate credit rating on Service Corp (NYSE: SCI) to 'BB+' from 'BB' The outlook is stable.

At the same time, we raised our issue-level ratings on the unsecured credit facility to 'BB+' from 'BB'. The recovery rating remains '3', indicating meaningful (50%-70%) recovery in the event of default.

We also raised our issue-level ratings on the unsecured notes to 'BB' from 'BB-'. The recovery rating remains '5', indicating modest (10%-30%) recovery in the event of default.

"Today's upgrade reflects our increased confidence that the company will operate with a financial policy of maintaining leverage between 3.5x and 4x. Following SCI's acquisition of Stewart, leverage peaked above 5x," said credit analyst Tahira Wright. "While we expected credit metrics would improve following the integration of Stewart, there were headwinds in consolidating SCI, the leading death care provider, with the number two player in the industry. SCI has demonstrated a smooth integration in the three quarters since the transaction closed."

Our stable rating outlook reflects our expectation that the company will maintain credit metrics that range between 3.5x and 4x in 2015 and beyond and that shareholder returns will be managed in a way that allows the company to preserve this range.

Downside scenario

As a result of the stable nature of the death care industry, we do not expect a sharp decline in profitability. However, a downgrade could occur if SCI pursued multiple acquisitions that increased leverage to a sustained level above 4x. A debt-financed acquisition of around $700 million could result in such a spike in leverage.

Upside scenario

Given that we expect leverage to range between 3.5x and 4x over the next two years, we consider an upgrade would be unlikely in the near term. An upgrade would be largely predicated on a shift in financial policy where the company prioritizes debt repayment over an aggressive growth strategy and shareholder returns that will result in leverage at a sustained level below 3x.

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