May 17, 2019 / 6:27 PM / a month ago

FOCUS-Direct lenders vie to resurrect cemetery owner StoneMor

(Adds share price move)

By Kate Duguid and Jessica DiNapoli

NEW YORK, May 17 (Reuters) - The rising debt load at U.S. cemetery operator StoneMor Partners LP has helped bring it to death's door, but specialized lending funds are clamoring to refinance the company's borrowings, according to sources familiar with talks.

In the wake of the financial crisis when interest rates sank to historic lows, StoneMor borrowed over $300 million to acquire cemeteries and funeral parlors. The strategy added the deathcare company to a generation of companies now saddled with debt that has limited growth prospects.

This borrowing binge led the Federal Reserve to warn in its most recent financial stability report that business debt over the past decade has grown faster than the overall economy. In the event of an economic downturn, high debt levels leave companies - and sectors - vulnerable to collapse.

StoneMor has not turned a profit since 2008, has missed deadlines to report financial results and has seen its share price fall from over $30 in 2015 to around $2 earlier this year. The deathcare company hired investment bank Houlihan Lokey to help it refinance its credit line as its existing lenders grew skittish about its deteriorating financial condition, according to the sources familiar with the deal.

Discussions to refinance StoneMor's nearly $200 million credit line are now in advanced stages, with a deal expected to close as soon as next month, the sources said, cautioning that the negotiations could still fall apart. The news helped lift StoneMor's share price 8.2% to $2.77 on Friday.

Specialty lenders, firms that make direct loans to middle market companies, are attracted to situations like that at StoneMor because of investor demand for ever-riskier assets, as safer bets yield little in the low-rate environment. The Fed has reported that leveraged loans grew 20% in 2018.

Funds managed by Ares Management Corp and Brookfield Asset Management have been vying to help refinance StoneMor's debt, according to the sources.

Those funds are up against targeted lending groups at Goldman Sachs Group Inc and Deutsche Bank AG, the sources said.

Houlihan Lokey, Ares, Brookfield, Goldman Sachs and Deutsche Bank declined to comment. The sources could not be identified because the details of the refinancing process are confidential.

StoneMor declined to comment on the refinancing.

In response to a request for comment on StoneMor and its potential turnaround, chief executive Joe Redling said, "I joined StoneMor in late July 2018, and have been working with my current management team to turn the company around since then. In recent investor communications, we outlined a number of steps we have undertaken to improve efficiencies and profitability which includes cost reductions and a comprehensive review of our asset base."

BACK FROM THE DEAD?

Buried by debt, StoneMor has eliminated 15 percent of its workforce since 2008, leaving it with a total headcount of 2,630 full time workers as of December 2018. A company spokesperson, confirming three former employee accounts, said that under prior management, StoneMor put in place hiring freezes and a furlough.

Some of StoneMor's salesforce departed as it changed its compensation structure and cut a popular contest offering trips to the Caribbean for top performers, according to two ex-employees. A spokesperson for the company confirmed the trip had been cut and acknowledged they altered their compensation for salespeople.

These efforts to conserve cash have so far done little to revive StoneMor. Earlier this year, Moody's downgraded StoneMor's debt deep into junk territory, indicating that investors may not receive all of their money back.

"Our rating reflects our concern that they will not be able to continue to make interest and principal payments," said Edmond DeForest of Moody's Investor Service.

StoneMor's $175 million bond due in June 2021, rated eight notches into junk by Moody's, now features a yield to maturity of 14.3%, nearly double its coupon of 7.875%, reflecting creditors' increasing skittishness about the prospect of being repaid.

A $35 million loan from its largest equity holder Axar Capital Management earlier this year has helped StoneMor stay alive. New leadership - Redling is its third chief executive in the last 18 months - is now attempting to change its corporate structure.

The company plans to convert into a C corporation as soon as this summer after a vote by unitholders, from its current form as a master limited partnership, a structure which entails large quarterly payouts to the company's investors. It ceased making the expected distributions to its limited partners in 2017, effectively closing off its access to public equity markets and hobbling its ability to acquire new cemeteries and grow its business.

Though the company is not expected to make any further payouts, Moody's still predicts it will be cash-flow negative this year.

ONE FOOT IN THE GRAVE

The outlook for the $20 billion deathcare industry is actually bright, thanks to the large and wealthy generation of Baby Boomers who are aging, and will soon require the services StoneMor provides.

Meeting that growing demand requires a cemetery company to acquire more property. StoneMor did just that after the financial crisis, borrowing heavily to buy smaller cemeteries from local entrepreneurs. It then added in its own operating system and costly perks, such as health benefits for employees, and corporate cars and credit cards for sales staff.

But the company failed to implement changes at new properties with consistency, DeForest said, making it difficult to tell which acquisitions were performing well and which were not.

"Acquisitions were never integrated," he said. "StoneMor tried to figure out integration as they went."

Interest costs tied up any cash the company could have used to buy new plots, limiting StoneMor's ability to expand.

As StoneMor saw its shares slide, stock in its competitor Service Corporation International has more than tripled. The company last year reported record profit and has maintained a debt level at around four times earnings.

Like StoneMor, Service Corp also made acquisitions to grow, but clustered assets, allowing cost-saving central management. Strategic acquisitions such as The Neptune Society Inc, the largest U.S. provider for the growing cremation business, have also boosted earnings.

Reporting by Kate Duguid and Jessica DiNapoli in New York; editing by Edward Tobin and Dan Burns

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