Monitronics: Convertible Debt Repurchase Terms Changed

Monitronics, which does business as Brinks Home Security, is a wholly owned subsidiary of Ascent Capital Group, a public company with the ticker ASCMA. The business is very highly leveraged, with debt of $1.8bn and adjusted EBITDA at Brink’s for nine months annualizing at under $300mn. The auditor of ASCMA has raised “Going Concern” doubts in its IIIQ 2018 statements .  In January 2019, the parent hired Moelis to help them consider “strategic alternatives” , which  include “an investment in the Company or its operating subsidiary Brinks Home Security by a third party”. Amidst of all this, ASCMA has been attempting to restructure its debt mountain and – controversially – has been seeking to redeem Convertible Notes due 2020. This has been going on for months, but the latest press release on March 22, 2019 suggests the transaction has been achieved by raising the tender price offered. In the greater scheme of things, though, the problems of Monitronics and its parent appear far from over. ASCMA has become a penny stock, closing at $0.65, down hugely in the past year from over $ a share. Surprisingly, the 4 BDCs with $12mn of aggregate exposure to Monitronics have continued to mark their investment at close to par value through September 2018. All the BDCs – which include Oaktree Strategic (OCSI), FS Investment non-traded funds II & III  and non-traded CCT II (the last 3 all part of the FS KKR construct) – are invested in the 2022 Term Loan. The senior nature of the obligation may have justified the generous values ascribed. However, in the IVQ 2018 valuations OCSI discounted the debt by (10%) for the first time and the other BDCs also applied lower valuations than in the past. Looking at the numbers, the huge amount of debt and the little liquidity available – not to mention the auditor’s Going Concern doubts – has kept this credit on our Watch List for some time, regardless of the BDCs numbers. We don’t know if the Convertible Debt repurchase is a win, or a loss or neutral, but before long we still expect a credit event  – such as a default or non-payment – to occur. About $1mn of investment income is at risk spread roughly evenly over the BDCs mentioned. Furthermore, barring a well heeled buyer coming along, full repayment of the 2022 Term Loan also has to be questionable.