Stewart Enterprises, a provider of funeral homes and cemeteries, is facing a costly refinancing through Deutsche Bank and Bank of America's $550 million credit. David Peknay, director of corporate ratings at Standard & Poor's, said the existing bank facility and notes due '03, are at favorable terms, but the choice is either to refinance and pay the new rates or not refinance and not pay the existing debt. Stewart is no longer investment grade and so banks want tighter security provisions and interest rates are higher, said Peknay.
The company intends to retire a $600 million revolving credit facility that matures on April 2002, and replace it with a downsized revolver, due 2005. A spokesman for the world's third biggest deathcare provider said that, upon completion of the refinancing, Stewart expects that its average borrowing cost will increase by 350 to 400 basis points. In addition, charges in the range of $5 million to $6 million will be incurred relating to the early extinguishing of debt. The aim is to improve the company's liquidity and extend the maturities, the spokesman noted.
The new senior secured credit facilities consists of a $225 million, four-year revolving credit facility; a $75 million, 18-month asset sale term loan; and a $250 million five-year "B" term loan. The company also plans to place privately $300 million in notes via a 144A deal. The bank meeting was last Thursday. Pricing on the pro rata is believed to be LIBOR plus 23/4 % while the institutional piece is priced at LIBOR plus 31/2 %, though the spokesman declined to confirm this. The old credit was priced at LIBOR plus 5/8%.
The refinancing plan will extend the maturities of Stewart's other long-term debt, except for the 18-month asset sale term loan, which will provide shorter-term financing while the firm pursues the sale of its foreign operations and excess cemetery property, noted the spokesman. As well as being pricier than the old credit, the covenants to be contained in the new credit agreement will also be significantly more restrictive than the covenants in its current credit agreement. NationsBank of Texas and Citibank provided the previous loan, according to Capital DATA Loanware.
Peknay, said that Stewart has put itself into a difficult position, growing too much, too quickly through debt. The returns expected from an acquisition binge were not realized, and the debt situation worsened, added Peknay. Furthermore, the practice of selling deathcare services pre-need, so that a sale is made but the cash is placed in trust until death means that the company is not managed in a cash-flow positive scenario. If the firm deleverages though, the interest may be at a higher rate, but the payments will reduce, he noted. Stewart has already entered into an agreement to sell its operations in Mexico for approximately $70 million, which will be used to pay down the asset sale term loan.