Monitronics International, Inc. – Files “Partial” Prepackaged Chapter 11, Looks to Shed $885.0mn in Prepetition Debt, Schedules August 7th Confirmation Hearing

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June 30, 2019 − Monitronics International, Inc. and eight affiliated Debtors (“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. The Company, which does business under the Brinks Home Security brand, provides residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services, in the United States, Canada and Puerto Rico. Wholly owned by Ascent Capital Group, Inc. (NASDAQ: ASCMA, “Ascent”), Monitronics is represented by Timothy A. Davidson of Hunton Andrews Kurth. Further board-authorized engagements include: (i) Latham & Watkins LLP as bankruptcy counsel (ii) Moelis & Company LLC as investment banker, (iii) FTI Consulting Inc. as financial advisor and (iv) Prime Clerk LLC as claims agent. 

The Company’s petition notes between 1,000 and 5,000 creditors; estimated assets of $1.33bn and estimated liabilities of $1.95bn. Documents filed with the Court list the Company's three largest unsecured creditors as: (i) U.S. Bank National Association as Indenture Trustee ($625.0mn Senior Unsecured Notes), (ii) ALARM.COM Incorporated  ($3.6mn trade claim) and (iii) Skyline Security Management, Inc. ($1.9mn dealer holdback claim). The Debtors have filed solicitation versions of their Plan and Disclosure Statement; with the Plan attached as Exhibit A to the Disclosure Statement and both filed at Docket No. 18.

In a May 21, 2019 press release announcing announcing the execution of a restructuring support agreement (the "RSA" or “Support Agreement”) with more than two-thirds of each of its senior noteholders and term lenders (see summary below), the Debtors stated, “Under the terms of the Support Agreement, up to approximately $685 million of debt will be converted to equity, including up to approximately $585 million of the Company's 9.125% Senior Notes due in 2020 and $100 million of the Company's term loans. The Company will also receive an additional $200 million in cash from the Company's noteholders through an equity rights offering and, subject to certain conditions, from Ascent in connection with the proposed merger with Monitronics…which cash will be used to, among other things, repay remaining term loan debt.

Following the completion of the restructuring, the Company is currently expected to have approximately $990 million of total debt. 

Under the terms of the Support Agreement, Monitronics and its subsidiaries would effectuate the proposed transactions through a partial pre-packaged plan of reorganization (the ‘Plan’) under Chapter 11 of the U.S. Bankruptcy Code ('Chapter 11'). The Company has already obtained support for the proposed transactions from holders of approximately 83 percent of its secured term loans and approximately 72 percent of its senior unsecured notes [NB: 74% as at Petition date]

As part of the anticipated Chapter 11 process, the Company has secured a commitment for $245 million in debtor-in-possession (DIP) financing that will be replaced by $295 million in exit financing at the completion of the reorganization. 

Concurrent with the completion of the reorganization of Monitronics under the Plan, Ascent will, subject to, among other things, the receipt of the requisite approval of Ascent's stockholders, merge into Monitronics (the 'Merger').  As a result of the Merger, all assets of Ascent, including an anticipated approximately $23 million in cash (the 'Target Cash Amount), will become assets of Monitronics."

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. The Company has already obtained support for the proposed transactions from holders of approximately 83% of its term loans and approximately 72% of its Senior Notes [74% as at Petition date].

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."

Debtor-in-Possession (“DIP”) Financing

In connection with their prepackaged Chapter 11 filing, the Debtors have received a commitment from KKR Credit Advisors (US) LLC (“KKR”) to provide a $245.0mn superpriority and priming DIP revolving credit facility (the “DIP Facility”) on terms set forth in a DIP/Exit Facility Commitment Letter annexed to the RSA.  If approved by the Bankruptcy Court as proposed, the DIP Facility would have the following key terms:

  • Facilities:   A superpriority and priming DIP revolving credit facility in an amount of up to $245.0mn, subject to availability under the Debtors’ borrowing base thereunder, including a letter of credit subfacility in the amount of $10.0mn.
  • Use of Proceeds:  To (i) pay certain costs, fees and expenses related to the Chapter 11 Cases, (ii) pay in full the claims of the revolving lenders under the Credit Agreement and (iii) fund working capital and general corporate purposes of the Company. 
  • Maturity: Expected to be the earlier to occur of: (i) 45 days from the date of the interim order, if the final DIP order has not been entered by the Bankruptcy Court on or prior to such date; (ii) 12 months after the Petition Date; (iii) the effective date with respect to any plan of reorganization; (iv) the filing of a motion by the Debtors seeking the dismissal of any of the Chapter 11 Cases, the filing of a motion by the Debtors seeking to convert any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code or the conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code; (v) the sale of all or substantially all of the Debtors’ assets; (vi) acceleration of the debtor-in-possession financing and the termination of the commitments under the DIP Facility; or (vii) the appointment of a Chapter 11 Trustee.
  • Interest Rates: Interest would accrue at a rate per year equal to the LIBOR rate (with a floor of 1.50%) plus 5.00% or base rate (with a floor of 4.50%) plus 4.00%.
  • Fees:
    • Unused Commitment Fee: 0.75% per annum on the daily unused amount of the revolving credit portion of the DIP Facility
    • L/C Commitment Fronting Fee: 0.25% per annum on the average daily amount of the letter of credit exposure of the DIP Facility 
    • Agent Fees: to be separately agreed upon between the Company and the administrative agent when appointed.

Prepetition Capital Structure

Debt

Maturity

Principal Amount Outstanding

Revolving Credit Facility

September 30, 2021

$181,400,000

Term Loan Facility

September 30, 2022

$1,072,500,000

Senior Unsecured Notes

April 1, 2020

$585,000,000

The following documents were attached to the Disclosure Statement:

  • Exhibit A : Plan 
  • Exhibit B : Organizational Structure Chart 
  • Exhibit C : Liquidation Analysis 
  • Exhibit D : Financial Projections 
  • Exhibit E : Valuation Analysis

Key Dates:

  • Post-Petition Voting Deadline: July 31, 2019
  • Objection Deadline for Plan and Disclosure Statement: August 2, 2019
  • Combined Hearing: August 7, 2019

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