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Rating Action: Moody's upgrades Carriage Services' CFR to B1, senior unsecured to B2; outlook stableGlobal Credit Research - 19 Feb 2021New York, February 19, 2021 -- Moody's Investors Service ("Moody's") upgraded Carriage Services, Inc.'s (Carriage) corporate family rating (CFR) to B1 from B2, probability of default rating (PDR) to B1-PD from B2-PD and senior unsecured rating to B2 from B3. The Speculative Grade Liquidity rating was upgraded to SGL-2 from SGL-3, indicating good liquidity. The outlook remains stable."Revenue growth, EBITDA margin expansion and substantial debt reduction resulted in strong free cash flow generation and a decline in year-end 2020 Moody's adjusted leverage estimated to be 4.5x," said Sean Cray, Moody's Analyst. Cray continued: "Despite uncertainty about 2021 organic revenue growth due to the coronavirus pandemic, which we view as a social risk under our ESG framework, we expect Carriage to continue improving its funeral market share and successfully integrate its recent acquisitions, resulting in continued margin expansion. Today's action also reflects governance considerations, specifically a less aggressive financial policy evidenced by Carriage's nearly 14% debt reduction through fiscal year 2020 and the company's expectation to reach 4x company-calculated leverage within the next few months."Upgrades:..Issuer: Carriage Services, Inc..... Corporate Family Rating, Upgraded to B1 from B2.... Probability of Default Rating, Upgraded to B1-PD from B2-PD.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3....Senior Unsecured Regular Bond/Debenture, Upgraded to B2 (LGD4) from B3 (LGD4)Outlook Actions:..Issuer: Carriage Services, Inc.....Outlook, Remains StableRATINGS RATIONALEThe B1 CFR reflects Carriage's small scale with about $330 million of annual revenue, high leverage with debt to EBITDA of 4.5x as of December 31, 2020, and modest free cash flow generation and interest coverage with free cash flow to debt of about 7% and EBITA to interest expense of about 2.7x over the next 12 to 18 months. The ratings also reflect the fragmented and competitive deathcare industry dynamics with larger and smaller competitors which could create pricing pressures or limit revenue growth. Moody's expects declining average revenue per service, a trend in the funeral industry for the past several years, to continue to pressure Carriage's ability to grow same-store revenue. The ongoing secular trends toward the increasing use of cremation services, which often generate lower revenue than traditional burial and funeral services, could also weigh on financial performance or impede revenue and profit growth over time.The ratings are supported by Carriage's established position as the second largest player in the fairly stable deathcare industry, with solid profitability reflected in EBITDA margins of about 30%. The value of select Carriage assets, including its diverse set of owned and controlled funeral and cemetery properties and a backlog of already-sold pre-need funeral and cemetery contracts, is likely greater than the amount of select liabilities, including its costs to perform under its contracted pre-need service contracts and its debt. The coronavirus pandemic caused a spike in deaths in 2020 and likely will in the first half of 2021 as well, which is benefitting Carriage's performance. Though there is uncertainty about death rates in the aftermath of the pandemic, Carriage is supported by demographic trends that include an aging US population and the expectation for higher death rates over the medium term.The SGL-2 rating reflects Carriage's good liquidity profile. Free cash flow of about $30 million per year before acquisitions is expected over the next 12 months. However, Carriage is not expected to maintain large cash balances as evidenced by the less than $1 million cash held as of December 31, 2020. Liquidity is supported by $144 million availability under its $190 million revolver expiring May 2023 (unrated). Financial covenants include a maximum leverage ratio (as defined in the credit agreement) of no more than 5.5x for the period ended December 31, 2020 and each quarter ended thereafter, and a minimum fixed charge coverage ratio (as defined) of 1.2x. We expect the company will maintain compliance with the financial covenants. Over the long term, we anticipate the revolver may be drawn from time to time to help fund acquisitions.The rapid and wide spread of the coronavirus pandemic and weak global economic outlook are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus pandemic as a social risk under our ESG framework, given the substantial implications for public health and safety.Governance risk is considered a positive factor as evidenced by the company's recent usage of free cash flow to pay down debt, Moody's expectation that future acquisitions will primarily be funded through internally generated cash flow, and the company's expectation to achieve company-calculated leverage of 4x within the next few months.The B2 rating on the senior unsecured notes reflects the B1-PD Probability of Default Rating and a Loss Given Default Assessment of LGD4. The B2 instrument rating also reflects the senior notes' position in the capital structure, behind the unrated secured credit facility.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's expectations for limited organic revenue growth, free cash flow to debt over 5% before acquisitions and good liquidity. The outlook incorporates Moody's expectation that Carriage's funeral and cemetery property purchases will be funded primarily with free cash flow and some debt proceeds.The ratings could be upgraded if revenue scale is expanded and Carriage demonstrates a track record of organic and inorganic growth while maintaining balanced financial policies that result in debt to EBITDA approaching 4x on a sustainable basis, free cash flow to debt approaching 10%, and the maintenance of a very good liquidity profile.The ratings could be downgraded if revenues or margins meaningfully decline, indicating a weakening competitive position, if financial policies become more aggressive such that Moody's expects debt to EBITDA will be sustained above 5.5x, or if liquidity deteriorates.Carriage, headquartered in Houston, Texas, is a public company which provides funeral and cemetery services and merchandise in the US. As of December 31, 2020, Carriage operates 176 funeral homes in 26 states and 32 cemeteries in 12 states across the US. Carriage generated about $330 million revenue for the fiscal year ended 2020.The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Sean Cray Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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