Monitronics International : Updated Company File

We are busy bringing up to date as many Company Files of underperforming BDC-financed businesses as we can. That involves – in part – circling back to our BDC Credit Reporter archives and seeing what has happened to companies we’ve written about in the past and filling in the multiple fields in the Company Files. It’s exhausting work, but is generating many interesting credit stories.

The latest is Monitronics International Inc. (aka Brinks Home), which has been on one BDCs books or another since 2012 according to Advantage Data’s records. Now the only lender is FS KKR Capital (FSK), but with what we call Major exposure of $119mn. (Anything over $100mn at cost gets the Major label). Admittedly, all the invested capital is in first lien debt and all performing.

Nonetheless, we have rated Monitronics CCR 3 – the first step down into being an underperformer on our 5 point scale. Please find attached the updated Company File – which includes the multiple BDC Credit Reporter articles we’ve written on this subject over the years, and much more data besides.

Here is what we wrote in our Credit Notes, where we summarize in the Company File our latest thoughts:

9/16/2022: There is a very long and complex history to the Monitronics/Brinks Home story and to the BDC involvement therein. Basically the company was highly leveraged, restructured itself in a pre-packaged bankruptcy which only increased its BDC exposure in late 2019. Since then valuations – at least – have recovered, until the last couple of quarters. The business needs new capital but failed to raise new high yield monies last year and is still on the hunt. This may become a problem credit again for FSK, which inherited this name from FSKR. The amounts involved are Major (over $100mn) so it’s worth paying attention.

Monitronics International: Reports IIIQ 2019 Results

Last time we discussed Monitronics International (dba Brinks Home Security), the company was filing for Chapter 11. Even then, management was aiming to be back operating normally once a major restructuring was effected. We were skeptical – wrongfully so – that this could be accomplished by September 2019 given the many moving parts. Our apologies to the many professionals involved because Monitronics was up and running again out of bankruptcy as a public company (ticker: SCTY) by the end of August.

The company did manage to shed a great deal of debt, as reinforced on the latest Conference Call: “Restructuring resulted in the elimination of over $800 million of debt, including $585 million of bond, and $250 million of the company’s term loans“.

Funnily enough, though, BDC exposure to Monitronics has substantially increased following the voluntary Chapter 11 and restructuring. From $51mn at cost in June 2019, BDC advances have nearly tripled to $148mn. The BDCs involved today are those who were present before, but generally speaking their exposure has greatly increased. That’s because of the nature of the restructuring which saw prior debt partly paid off in cash, equity in SCTY and new Term debt due in 2024. To that was added $295mn in new Term debt and a Revolver. Regarding the latter, $124mn has yet to be drawn.

This is all a wonder of financial engineering, but from what we can tell term debt has only been decreased by just under $100mn, and the revolving debt – if fully drawn – will be greater than the prior balance outstanding. The big change is the write-off of $585mn in 2020 Senior Notes, which received a little cash and 18% of the equity. For all the turgid details see pages 16-18 of the 10-Q.

This leaves Monitronics less leveraged, but not necessarily out of the woods. The company reported its latest results on November 13, which are a mix of before and after bankruptcy and not very instructive from an earnings standpoint. Management did not brave any questions and is still working on its 2020 Plan. As a result neither the BDC Credit Reporter, nor anyone else, has any meaningful metrics to work with. We do note, though, that debt to Adjusted EBITDA (annualizing the IIIQ) remains close to 5:1, and that’s before we get into any mandatory capex.

In any case, Monitronics/Brinks is facing a changing industry, and real challenges with customer attrition that lower debt will not change. Management is promising to make major improvements in how the business is run, promising a “best-in-class” customer experience, including transforming the “sales process from hiring to training, to performance management” and much more in that vein. We wish Monitronics well, but there’s a lot to do in what remains a highly leveraged business with myriad competitors.

This is a classic example of stakeholders – including BDC lenders – “doubling down” on a failing business through a restructuring process. Historically security companies like this one have been cash cows and Brinks has a well known and respected name. So we understand the impetus to try again with a new capital structure and strategic approach. There are no regulators to wag their fingers at the lenders involved and if this does not work out failure is likely to be some time off given the Revolver availability. Regardless, we are rating the “new” Monitronics CCR 4 (WorryList) till we get more tangible news about post-bankruptcy performance, but expect we’ll be reporting back periodically for some time.

Monitronics: Files Chapter 11

Monitronics International – an alarm monitoring company that we’ve discussed on two prior occasions on March 23, 2019 and again on May 23, has filed for a pre-packaged Chapter 11. It’s fair to say that the restructuring plan – approved by most creditors but still requiring shareholder approval of the parent of the company – Ascent Capital – is highly complex. From what we understand Monitronics will be shedding about half of its existing debt load; raising a quarter billion dollars of debtor-in-possession debt financing to be followed by even more “exit financing”; as well as raising equity capital through a Rights Offering and receiving $23mn from Ascent as part of a scheme to have the parent absorbed by the subsidiary. At the end of all this Monitronics – despite having nearly $1bn in debt still on its books – will have “the strongest balance sheet in our industry”, according to the CEO.  We’re still trying to determine what the impact of this restructuring plan will have on the 5 BDCs with $20.7mn of term debt exposure. At March 31, 2019 the debt was already discounted to varying degrees. A final accounting will have to wait till this bankruptcy process plays out. Management is predicting an exit within 75 days, or mid-September. Given the numerous moving parts, we are skeptical about the timetable, even though we’ve seen this pre-packaged Chapter 11 situations move through the courts in as little as one day ! For the moment at least, the most tangible impact is that investment income on the debt will be interrupted for some or all the third quarter of 2019. The biggest impact will be felt by Business Development Corporation of America (BDCA), which has half the total BDC exposure.

Monitronics: Enters Into Restructuring Agreement With Creditors

On May 20, 2019, the wholly-owned subsidiary of publicly traded Ascent Capital Group (ASCMA) – Monitronics International Inc.entered into a Restructuring Support Agreement (“RSA”) with its latest creditor. This is part of a major restructuring effort that will reduce Monitronics debt and see the parent company merge into the parent as part of a pre-packaged bankruptcy. BDC exposure aggregates $21mn, spread over 5 public and non- public funds.

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.