Dec 12 -
Summary analysis -- Monitronics International Inc. ---------------- 12-Dec-2012
CREDIT RATING: B/Stable/-- Country: United States
Primary SIC: Security systems
Mult. CUSIP6: 609453
Credit Rating History:
Local currency Foreign currency
11-Apr-2012 B/-- B/--
14-Mar-2012 NR/-- NR/--
The rating on Monitronics International Inc. reflects the company’s “highly leveraged” financial risk profile, its reliance on debt to fund anticipated growth, and its more limited scale compared with its largest competitor. A highly recurring revenue stream and continuing revenue growth partially offset those factors.
Monitronics provides electronic security alarm monitoring services to more than 800,000 subscribers in the U.S. and Puerto Rico through security systems installed by independent dealers (pro forma for the acquisition of Pinnacle Security).
Monitronics uses the dealer origination model to acquire new customer accounts. Under this model, the company purchases accounts from a network of independent dealers instead of creating the accounts internally. This results not only in a lower and more flexible cost structure, but also in higher customer creation costs than for internally created accounts; free cash flow is also lower since account acquisition expenses are reflected on the cash flow statement. Since the industry attrition rate is about 10% to 12% annually, significant customer acquisitions are necessary just to maintain level operating cash flow and a subscriber base.
Although Standard & Poor’s Ratings Services expects the company to generate sufficient operating cash flow to buy the customer accounts necessary to offset attrition, Monitronics will have to use debt to finance anticipated growth. We view customer acquisition costs as an essential part of the company’s business.
Monitronics’ business risk profile is “weak.” The alarm monitoring industry is highly fragmented with low barriers to entry and it is somewhat susceptible to downturns in the housing markets and economy.
Monitronics is one of the largest second-tier alarm monitoring companies, alongside Protection One and Vivint, but its revenue base is significantly smaller than industry leader ADT.
Our business evaluation is supported by Monitronics’ highly recurring and growing revenue base, as well as an efficient dealer business model that allows the company to maintain higher margins compared with its competitors. The company’s revenues for the last 12 months ended Sept. 30, 2012 were approximately $330.8 million, an increase of about 9.6% over the prior-year period, resulting from an increase in its subscriber base and revenue per subscriber, as well an approximately $2.3 million of deferred revenue fair value adjustment in connection with Ascent’s acquisition, which reduced revenue in 2011. Revenues for the three months ended Sept. 30, 2012 were $84.7 million, a 6.5% year-over-year increase. We expect Monitronics’ revenues to growth in mid-double digits in fiscal 2013, resulting from the recent purchase of approximately 93,000 security alarm monitoring contracts from Pinnacle Security, additional subscriber growth, and an increase in average recurring monthly revenue.
Monitronics’ financial profile is “highly leveraged,” with adjusted debt/EBITDA of about 8x for the 12 months ended Sept. 30, 2012. The company’s purchase of Pinnacle Security, results in minimal change in pro forma total leverage.
The EBITDA number is adjusted to reflect the purchases of new accounts necessary to offset attrition. Over the near term, leverage should remain in the same area due to debt and account purchases.
Free cash flow is negative, which reflects a high growth rate achieved through ongoing spending on new dealer accounts. However, this spending is discretionary and can be adjusted to reflect changing conditions.
Monitronics’ liquidity is “adequate”(based on our criteria), comprising $150 million availability under the revolver and modest cash flow from operations. The company has minimal cash balances. The revolving facility’s primary purpose is to fund growth.
Uses of cash include mandatory debt amortization of around $7 million, along with capital expenditures, which include account purchases from dealers.
Other relevant aspects of Monitronics’ liquidity, in our view, are:
-- We expect sources of cash to exceed uses by more than 1.2x for the near term.
-- Net sources are likely to be positive, even if EBITDA declines by 15%.
-- The company had approximately 19% cushion under its consolidated total leverage ratio covenant as of Sept. 30, 2012.
The stable outlook reflects Monitronics’ stable operating cash flow generation, resulting from its recurring and predictable revenue base. It also reflects our expectation that the company will maintain its competitive position in the residential alarm monitoring industry and can reduce account purchases, if needed.
An upgrade in the near term is unlikely, given the company’s highly leveraged financial profile and our view that it will continue using debt to finance growth rather than repay debt. We could lower the rating if an increase in attrition leads to the need for additional customer account acquisitions, and consequently, to a deterioration in cash flow and liquidity.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008