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SRV Report, 4/00

Report on Service Corporation International (NYSE: SRV)
As of April 16, 2000
Sean G. Thomas

Last Trade: $4 3/16
Shares Owned: 112
Market Price: $469.00
Cost Basis: $2,584.88
Total Loss: $2,496.79
Percent Loss: 84.19%

Broker Recommendations:
Moderate Buy: 1
Hold  10
Other  0


No news from wire reports on SRV since the last meeting. However, I did
find this seemingly well-researched message on Yahoo’s SRV discussion
board re: the company’s debt restructuring and potential for bankruptcy…

Notes from Yahoo newsgroup, 3/26/00:
by: joeblack_08807
3/26/00 11:23 am
Msg: 7034 of 7040

Fbuster's point is exactly the problem why one should be very careful
about SRV. The point is no one can quantify the percentage of the
downside risk due to the pending debt restructuring. In addition, due to
the track record of SRV management, the confidence on whether SRV can
deliver the projected operating results is low.

The free cash flow from operations after a one time restructuring charge
is projected at $25M to $125M this year. Free cash flow from assets sale
is projected at $200M to $300M range.

I've studied a little on SRV debt situation. There are 3 debts due this

1. $300M credit facility revolver in March 2000. SRV has the right to
turn this facility to a two-year term loan. I think this is what SRV
will do so the immediate insolvency is not going to happen. This will
absorb a significant portion of the free cash flow.
2. $95M bond due 11/2000. The bond was worth $150M. The outstanding
balance is $95M due to the buy back. The free cash flow can probably
cover this if SRV can close the sale of assets before then.
3. $600M revolver due at the end of Oct. 2000. I don't know how much is
outstanding on this facility but it's critical that SRV get an extension
on this facility as SRV will not have sufficient funds to cover it. I
think the chance that the bank pulls the plug is low. If it does, SRV
will be in Chapter 11. If other creditors restriction allows, which I
don't know, I think the bank will roll the balance of the facility into
a senior debt with some kind of lien on the proceeds of future sales of
assets and no more borrowing under the facility. This arrangement is
good for both sides. SRV would avoid Chapter 11. The bank will lose more
if it forces a Chapter 11 now because the debt will be ranked same as
other bondholders. If SRV goes into Chapter 11 in the future, the bank
will rank higher than the rest of the creditors.

My analysis suggests that after 11/2000, SRV will have no more borrowing
power. All liquidity will have to be generated from the operation. There
is no margin for error.

The next debt due is $150M bond on 6/01. If the operation is very good
or DC property market has recovered, there is a chance that SRV could
still pay it off when due. Otherwise, SRV will be in Chapter 11.

The real problem is $700M revolver and $141M bonds due 6/02. There are
two things could happen. If DC industry does not recover, SRV is very
likely in Chapter 11, as SRV will have no more cards to satisfy the
creditors. If the DCI recovers to something similar to the historical
level, then SRV has a real equity. The stocks will appreciate
significantly from now. SRV will have good chance to refinance the debt
or raise sufficient funds in the equity market.

I believe that the bond prices are consistent with my analysis. Bonds
due 11/2000 sell for 93 cents on the dollar, indicating the creditors
don't believe SRV will go Chapter 11 this year. The bonds due 6/01 sells
for 73 cents on the dollar compare to 54 cents on the dollar for bonds
due in 2004, indicating the creditors have some confidence in SRV on or
before 6/01. However, the 04 bondholder have little confidence and are
prepared to be the junior debt holder in Chapter 11 proceedings.

In summary, the downside risk is significant, as there are many
uncertainties ahead. If things don't work out, SRV common shares value
is dubious at best. The upside is also significant if the DC property
market recovers as SRV sits on a huge portfolio of DC properties. I am
not ready to buy  SRV shares at this level, not yet.