OREANDA-NEWS. Fitch Ratings has affirmed Dignity Finance plc's class A and B notes at 'A' and 'BBB', respectively. The Outlook is Stable.

The transaction has performed well in the 12 months to June 2015, outperforming the long-term historical trend (revenue and EBITDA 12-year CAGRs of 7.3% and 9.3%, respectively). EBITDA (including central overheads) has grown by 24% to GBP114.0m from GBP91.9m as a result of 14.5% revenue growth and effective cost control. Revenue growth was driven primarily by an increase in the death rate (12.7% yoy increase in the 26 weeks to 26 June 2015 in England and Wales - source: ONS), further increases in average income per funeral of 8.6% and 6.8% per cremation (trailing-12-months December 2014), as well as the addition of 17 funeral services retail locations (2.4% increase) versus June 2014. Opex increased by only 7.9% (not including central overheads), partly as a result of the high operating leverage, which is beneficial in an environment of growing revenues. The strong operating performance resulted in improving historical and projected FCF DSCR metrics which support the affirmation and Stable Outlook.

An improving credit profile would usually lead to a potential upgrade of the notes. However, the bond documents permit issuance of further or new notes as long as the existing classes of notes are not downgraded to below their original (at closing) ratings. Consequently, Fitch will not upgrade the class A and B notes above 'A' and 'BBB', respectively (for further details, see Rating Criteria for Whole Business Securitisations).

Dignity is a WBS of funeral homes and crematoria in the UK, comprising 715 funeral homes and 39 crematoria. The Dignity group is the second-largest provider of funeral services in the UK and the largest provider of crematoria services.

KEY RATING DRIVERS (KRDs)
Industry Profile: Midrange
Fitch considers funeral services a mature industry, albeit one subject to demographic trends. Volume risk is limited as demand is rather stable and fairly predictable, particularly over the longer term. Barriers to entry exist for new operators due to the importance of local referrals (for funeral services) or the difficulty in developing new greenfield facilities in the UK (for crematoria) in what is otherwise a rather fragmented market with a large number of small players.

(Sub-KRDs: Operating environment: Midrange, Barriers to entry: Midrange, Sustainability: Stronger)

Company Profile: Midrange
Dignity has consistently delivered positive trading performance over the past 12 years, even during the most challenging times of the economic cycle. This has been achieved through above-inflation price increases, selected acquisitions and a reinforced presence in the highest-yielding segments, namely cremations. However, Dignity's intention to maintain its market share in less profitable pre-arranged funeral plans is expected to affect margins.

(Sub-KRDs Financial performance: Stronger, Company operations: Midrange, Transparency: Stronger, Dependence on operator: Midrange, Asset quality: Midrange)

Debt Structure: Stronger (Class A)/Midrange (Class B)
The notes are fixed-rate and fully amortising, benefiting from a strong UK WBS security package as well as from strong structural features such as a tranched liquidity facility and fairly high thresholds for both the restricted payment conditions and the financial debt service coverage ratio (DSCR) covenant. The class B notes' lower attribute is due to their contractual subordination and late maturity in 2049.

(Sub-KRDs Debt profile: Stronger (class A)/Midrange (class B), Security package: Stronger (class A)/Midrange (class B), Structural features: Stronger)

Peer Group - Dignity's closest peers are the Fitch-rated UK WBS pub transactions. Considering that Dignity's cash flow is more stable and not directly correlated to the economic cycle, we expect that at similar rating levels, the DSCR threshold would be lower, and on this basis Dignity's free cash flow (FCF) DSCR compares favourably.

RATING SENSITIVITIES
The ratings could be adversely affected if performance deteriorates significantly below Fitch's base case, notably due to a lack of ability to apply above-inflation price increases or due to an accelerated loss in market share (with a change in competitive landscape). A significant increase in the number of short leaseholds could also negatively affect the ratings, as this could increase the operating leverage of the transaction (with an increase in senior debt-like rental payment obligations). However, given the significant increase in EBITDA over the past year, even a fairly substantial reduction in performance is unlikely to result in negative rating action given the current cushion in the ratings.

TRANSACTION PERFORMANCE
The strong performance in the 12 months to June 2015 in addition to a tax inflow of GBP700,000 (a reduction of around GBP12m vs. the previous year primarily due to the refinancing) resulted in FCF (including rental expense) of GBP92.7m, which was 55.3% above the previous year at GBP59.7m. The resulting forecast rent-adjusted FCF DSCR metrics improved to 3.24x from 2.66x for the class A notes (at the October 2014 refinancing) and 2.10x from 1.81x for the class B notes. However, the death rate, which is a key driver of revenues, is likely to revert to the mean in the next few years having been exceptionally high in the 26 weeks to 26 June 2015 (12.7% yoy increase). Fitch also does not assume any recurring reduction in tax. Therefore, FCF may rebase at the next review with the result that the projected metrics could weaken.

However, the projected metrics are supported by continued strong growth in average income per funeral/cremation for both the key revenue drivers of funeral services and crematoria, an expectation that the death rate will continue to gradually increase over the long term (despite some short-term variability), and the moderate base case assumptions (resulting in FCF CAGR 2015-49: -0.1%), which do not rely on significant price or volume increases to sustain them. Actual performance was also comfortably above Fitch's previous base case.