Monitronics International, Inc. – Emerges fron Bankruptcy, Merges with Ascent and Sheds $885mn of Debt

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August 30, 2019 – The Debtors notified the Court [Docket No. 222] that their Joint Partial Prepackaged Plan of Reorganization has become effective as of August 30, 2019. The Court had previously approved the Debtors' Plan on August 7, 2019, [Docket No. 199].

On June 30, 2019, Monitronics International, Inc. and eight affiliated Debtors (d/b/a Brinks Home Security, “Monitronics” or the “Debtors”), filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-33650. In their lead Petition, the Debtors, who provide residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services, noted between 1,000 and 5,000 creditors; estimated assets of $1.33bn and estimated liabilities of $1.95bn.

In a press release, Monitronics stated that "it has successfully emerged from Chapter 11 protection and has merged with Ascent Capital Group, Inc. ('Ascent'), marking the completion of the Company’s financial recapitalization. As a result of the financial recapitalization, Monitronics’ largest shareholders will be EQT Credit '“EQT'), the credit arm of EQT Partners, a global investment firm with around EUR 40 billion in assets under management, and Brigade Capital Management ('Brigade'), a global investment management firm. Trading of the new Monitronics shares is expected to begin on or before September 4, 2019. Shares will trade on the OTC Markets under the ticker 'SCTY'.

Monitronics emerged from Chapter 11 protection having eliminated approximately $885 million of debt, including approximately $585 million aggregate principal amount of the Company’s 9.125% Senior Notes due 2020, $250 million of the Company’s term loans and $50 million of the Company’s revolving loans. Approximately 14% of the Company’s 9.125% Senior Notes due 2020 received cash and the remainder, along with $100 million of the Company’s term loans, were converted into equity. Approximately $823 million of the Company’s term loans were converted into a new term loan facility. Upon emergence, the Company also gained access to $295 million of additional liquidity under new exit financing (consisting of a $150 million term loan facility, and a $145 million revolving facility) to support its continued growth and ensure it can continue to execute on its strategic plan. The Company further reduced outstanding indebtedness and paid fees and expenses related to the recapitalization transactions from the receipt of an additional  $200 million of cash comprised of $177 million in proceeds through an equity rights offering and approximately $23 million from Ascent in consideration for which the Ascent shareholders received, in the aggregate, 5.82% of the equity of the Company, or 1,309,757 shares of Monitronics common stock, based on a final exchange ratio of 0.1043086 of a share of Monitronics common stock for each outstanding share of Ascent common stock (other than (i) shares of Ascent common stock held by Monitronics or by Ascent as treasury shares or (ii) shares of Ascent common stock held by stockholders who did not vote for or consent in writing to the merger and who properly made a demand for appraisal of such shares pursuant to, and who complied in all respects with, the provisions of Section 262 of the General Corporation Law of the State of Delaware and did not thereafter fail to perfect, effectively withdraw, or otherwise lose their right to appraisal).”

Key Terms of the Plan

As a result of the proposed restructuring transactions, the Debtors expect to eliminate approximately $885.0mn of debt ($685.0mn equitized prepetition debt and $200.0mn repaid from proceeds of a rights issue), leaving it with approximately $990.0mn of total debt outstanding upon emergence. 

Pursuant to the terms of the RSA and the Restructuring Term Sheet (the latter attached to the former), on the effective date of the Plan:

  • the revolving lenders under the Credit Agreement will receive payment in full on account of their revolving credit loans from the proceeds of borrowings under a new $245.0mn DIP Facility to be entered into following the date on which the Debtors commence the Chapter 11 Cases in accordance with the RSA (the “Petition Date”);
  • each of the lenders under the DIP Facility will receive payment in full in accordance with the terms and conditions of the DIP/Exit Facility Commitment Letter;
  • with respect to the approximately $1.072bn of term loans outstanding under the Credit Agreement, each term lender (other than term lenders equitizing their term loans), will receive its pro rata share of (i) $150.0mn in cash from the proceeds of a rights offering described below, which, together with the equitization of $100 million of the term loans, will result in an aggregate reduction of term loans by $250.0mn in principal amount, and (ii) term loans under the $822.5mn Takeback Exit Term Loan Facility;
  • holders of the $585.0mn in outstanding Senior Notes (the “Noteholders”) will receive cash in an amount equal to 2.5% of the principal and accrued but unpaid interest due under the Senior Notes held by such Noteholder or, to the extent that a Noteholder elects not to receive cash, its pro rata share of 18.0% of new common stock of reorganized Monitronics (as contemplated by the RSA, “Reorganized Monitronics” and such stock, the “New Common Stock”) to be issued and outstanding as of the effective date of the Plan, subject to dilution by the post-emergence management incentive plan, and rights to acquire additional shares of New Common Stock to be issued in the rights offering;
  • solely in the event and to the extent that a Non-Ascent Restructuring "Toggle Event" has not occurred and, the merger of Ascent with and into Monitronics, with Monitronics as the surviving company (the “Merger”), is consummated pursuant to the terms of the RSA, the Restructuring Term Sheet and the related merger agreement, all assets of Ascent at the time of the Merger shall become assets of Reorganized Monitronics and Ascent stockholders will receive up to 5.82% of shares of New Common Stock following the restructuring (assuming the Net Cash Amount is $23.0mn); and
  • all trade claims (whether arising prior to or after the commencement of the Chapter 11 Cases) will be paid in full in the ordinary course of business, and the Company will continue operating its business without disruption to its customers, vendors, partners or employees.

The following is a summary of classes, claims, voting rights and projected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement)

  • Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 2 (“Prepetition RBL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated aggregate principal amount of claims is $182.4mn and expected recovery is 100%.
  • Class 3 (“Prepetition Term Loan Claims”) is impaired and entitled to vote on the Plan. Each Holder of an Allowed Prepetition Term Loan Claim shall receive: (i) its pro rata share of (A) the Effective Date Pay Down and (B) the Takeback Exit Term Loans and commitments under the Takeback Exit Term Loan Facility Credit Agreement and (ii) payment in full in Cash of all accrued and unpaid interest on such Allowed Prepetition Term Loan Claim due under the Prepetition Credit Agreement. Estimated aggregate principal amount of claims is $1,072.0bn and expected recovery is unknown.
  • Class 4 (“Prepetition Notes Claims”) is impaired and entitled to vote on the Plan. Each Holder of an Allowed Prepetition Notes Claim shall receive (i) its pro rata share of the Cash Payout, or (ii) solely to the extent that such Holder timely and validly elects to be a Cash Opt Out Noteholder, receive its pro rata share of the Notes Shares and (B) be eligible to exercise Rights to acquire Rights Offering Shares at the Exercise Price in accordance with the Rights Offering Procedures. Estimated aggregate principal amount of claims is $585.0mn (plus interest of not less than $40.5mn) and expected recovery is unknown. NB: "Cash Payout…means Cash in an aggregate amount equal to 2.5% of the principal and accrued but unpaid interest due under the Prepetition Notes held by the Prepetition Noteholders that are not Cash Opt Out Noteholders." 
  • Class 5 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Each Holder of an Allowed General Unsecured Claim shall be paid in full in Cash.
  • Class 6 (“Intercompany Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
  • Class 7 (“Affiliate Equity Interests in any Monitronics Subsidiary”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Effectively unchanged.
  • Class 8 (“Monitronics Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. All Class 8 Monitronics Equity Interests shall be cancelled and extinguished.

Restructuring Support Agreement

On May 20, 2019, the Debtors and Ascent entered into the RSA with (i) in excess of 66 2/3% in dollar amount of holders of its 9.125% Senior Notes due 2020 (the “Senior Notes” and such holders, the “Consenting Noteholders”), (ii) in excess of 66 2/3% in dollar amount of holders of term loans (“Consenting Term Lenders” and together with the Consenting Noteholders, the “Consenting Creditors”) under its credit agreement, dated as of March 23, 2012 (the “Credit Agreement”), and (iii) Ascent, to support the restructuring of the capital structure of the Debtors on the terms set forth in the term sheet annexed to the RSA (the “Restructuring Term Sheet”).

The various related transactions are set forth in, or contemplated by, the Restructuring Term Sheet, the Rights Offering and Equity Commitment Term Sheet, the DIP/Exit Facility Commitment Letter, the Takeback Exit Term Loan Facility Term Sheet and the Governance Term Sheet, each of which are annexed to the RSA. 

Commencing on the effective date of the RSA, each Consenting Creditor has agreed to continue to forbear, until the date that is one day after the date on which the Debtors commence the Chapter 11 Cases in accordance with the RSA, from exercising its rights (including any right of set-off) or remedies available under the Credit Agreement and that certain Indenture, dated as of March 23, 2012 (as amended, restated, supplemented or otherwise modified from time to time, the “Indenture”), as applicable, in each case, solely with respect to certain specified defaults.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Graffam Declaration”), Fred A. Graffam III, the Debtors’ Chief Financial Officer and Senior Vice President, detailed the events leading to the Debtors’ Chapter 11 filing:

"In the years leading up to their proposed restructuring, the Debtors’ attempts to grow and maintain their customer base through changing market conditions resulted in a highly leveraged capital structure. Beginning in late 2012, the Debtors made a series of acquisitions that increased the Debtors’ customer base and leverage profile. Due to prevailing market conditions at the time of these acquisitions, the Debtors funded some acquisitions with the issuance of both secured and unsecured debt. Moreover, as a result of such acquisitions, the Debtors’ expanded customer base resulted in additional debt capacity under the Prepetition Credit Agreement. As competition in the security monitoring sector increased, driven in part by market valuations of security monitoring providers, the Debtors sought to offset unanticipated customer and dealer attrition by entering into contractual arrangements with certain dealers at a time when market conditions were favorable to dealers. As market conditions have changed, the Debtors have sought to diversify their customer acquisition channels, including through the 2015 acquisition of LiveWatch Security, LLC, but the Debtors’ customer base, and therefore revenue, has continued to decline. In addition to the changing market landscape, the Debtors’ business has faced a number of other challenges in the years leading up to their proposed restructuring, including costly conversion projects as the Debtors have sought to keep up with a changing technological landscape."

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