Rpt fitch affirms dignitys finance plcs class a & b notes; stable outloo

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(Repeat for additional subscribers)July 18 (The following statement was released by the rating agency)Fitch Ratings has affirmed Dignity's Finance plc's class A and B notes. A full list of rating actions is at the end of this release. KEY RATING DRIVERS The affirmation is principally supported by Dignity's stable performance, which is reflected in EBITDA growth above Fitch's base case assumption for 2013. The trailing-12-month to December 2013 EBITDA was GBP88m, effectively growing year-on-year by 12.7% (or a Fitch-estimated 7% when excluding the annualised impact of Yew Holdings, its most recent acquisition). The EBITDA margin has remained broadly flat year-on-year at 35.6%. This recent growth has been achieved through a combination of price and volume growth as well as acquisitions (which Fitch does not typically take into account for its base case forecast). Fitch's base case free cash flow (FCF) debt service coverage ratios (DSCRs) for the class A and B notes (minimum of both the average and median DSCRs to legal final maturity) remained broadly stable at 2.69x (from c. 2.72x) and 1.62x (from 1.68x), respectively. This base case conservatively assumes EBITDA growing at a compounded annual growth rate of 0.8% over the next 10 years. These solid DSCRs are also backed by an annuity-like debt profile, which contrary to other UK WBS transactions, removes any point in time stresses.

EBITDA leverage has decreased due to a combination of growth in EBITDA and amortisation of debt, allowing for a further decline in June 2014 to 1.8x for the class A notes and 3.9x for the class B notes (down from 2.0x and 4.3x, respectively, at tap in July 2013). The acquisition of properties on short leaseholds over the years (exceeding the acquisition of long lease/freeholds) means that Dignity has a material rental cost, currently representing about 12% of its EBITDA compared with 10% back in 2006. As a result, taking into account the senior debt-like characteristics of the rents, the rent-adjusted base case FCF DSCRs at 2.09x and 1.46x, respectively, for the class A and B notes are notably lower than the FCF DSCRs, albeit still in line with their ratings (notably for the most senior class A notes). The class A notes' rating is constrained by Fitch's rating cap for the funeral home industry, which prevents them from being rated above 'A+'. Although the funeral/crematoria services industry is largely non-cyclical and typically benefits from stable and predictable cash flow backed by strong fundamentals (with favourable demographics), it remains a highly fragmented niche market (led, with the exception of the Co-op, by small non-diversified companies) and hence is more vulnerable to any change in its operating environment (e.g. competitive landscape). The Stable Outlook is underpinned by the predictable and relatively stable nature of the industry. Despite a steady decline in Dignity's market share (due to increased local competition) and a reduction in the number of deaths in the UK in recent years, both impacting volumes, the company has consistently grown EBITDA through above inflation price increases (demonstrated low pricing elasticity to demand) and a selective acquisition strategy (of both funeral homes and crematoriums). An anticipated single digit increase in the number of deaths is anticipated to materialise around 2015 with the ageing of the baby boomer generation (source: ONS), thus providing further comfort about the sustainability of Dignity's future revenue stream.

RATING SENSITIVITIES The ratings could be adversely affected if performance dropped significantly below Fitch's base case, notably due to potential future 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 the increase in senior debt-like rental payments obligations).

Dignity is a whole business securitisation of funeral homes and crematoria in the UK, comprising 697 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. The rating actions are as this site class A secured fixed rate notes due 2023: affirmed at 'A+'; Outlook StableGBP206.3m class B secured fixed rate notes due 2031: affirmed at 'BBB+'; Outlook Stable