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Monitronics International, Inc. -- Moody's affirms Monitronics' Caa1 CFR; changes outlook to positive

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Rating Action: Moody's affirms Monitronics' Caa1 CFR; changes outlook to positiveGlobal Credit Research - 08 Apr 2021$1.1 billion of rated debt affectedNew York, April 08, 2021 -- Moody's Investors Service, ("Moody's") affirmed Monitronics International, Inc.'s ("Monitronics") credit ratings, including the Caa1 corporate family rating ("CFR") and Caa1-PD Probability of Default Rating ("PDR"), as well as B1 facility ratings on the residential alarm monitor's first-lien super-priority debt, including a $145 million revolver and a $150 million term loan. Moody's affirmed the Caa2 instrument rating on the company's $812 million (amortized amount as of year-end 2020) first-lien term loan. Monitronics' Speculative Grade Liquidity rating continues to be SGL-3, reflecting adequate liquidity. Moody's changed the company's outlook to positive, from stable.Affirmations:..Issuer: Monitronics International, Inc..... Corporate Family Rating, Affirmed Caa1.... Probability of Default Rating, Affirmed Caa1-PD.... Senior Secured Super-priority 1st lien Bank Credit Facilities, Affirmed B1 (LGD1).... Senior Secured 1st lien Bank Credit Facility, Affirmed Caa2 (LGD4)Outlook Actions:..Issuer: Monitronics International, Inc.....Outlook, Changed To Positive From StableRATINGS RATIONALEMonitronics' improved outlook takes into account a generally positive trend in credit metrics and operating performance, including revenue stabilization and declining execution risks with regard to the company's evolving sales strategy. In 2020 Monitronics posted improvements in attrition and creation multiples, as well as in cash flow from operations and free cash flow, the latter which turned slightly positive. Revenues were effectively flat for the year, at $504 million, in contrast to Moody's expectations for a low-single-digit percentage decline.While Moody's expects operating trends to continue to be moderately favorable again this year, the company faces tens of millions of dollars in annual upgrade expenditures for customers that use 3G or CDMA telecom technologies that those technologies' providers are in the process of phasing out. At present approximately 35% of Monitronics customers may require their alarm monitoring systems to be upgraded in order to work with the next generation of telecom technology. Through year-end 2020, Monitronics has spent close to 30% of the total, approximately $90 million estimate for conversion costs. These likely obligations -- subscribers with older cellular networks may need to have certain security equipment replaced to maintain their monitoring service -- will make demands on Monitronics' liquidity and could pressure attrition. Other initiatives like bulk purchases of subscribers and earn-out obligations could strain liquidity. Monitronics has a small amount of cash on hand and about $125 million of availability under its revolver that Moody's believes provide adequate liquidity to meet the combined demands of growth initiatives and 3G conversion outlays.The positive outlook takes into account Moody's expectations for a continuation in 2021 of generally improving trends in operating metrics that were posted in 2020, including a return to revenue growth and improvements in subscriber attrition rates, creation multiples, and steady-state free cash flow, the last of which Moody's expects may turn slightly positive this year. The outlook also reflects a continued and successful transition from an all-dealer network to a hybrid sales model employing both dealer and direct-to-consumer ("DTC") channels, with the expectation that dealer sales will generate three quarters of revenue by the end of this year, as compared with more than 90% in 2019.Bulk subscriber purchases and DTC sales (the latter which includes lower-ARPU, DIY customers) are becoming an increasingly important revenue source for Monitronics and will help to continue to bring down creation costs given lessened reliance on the dealer network. Attrition should continue to ease over the next couple years as well, as the company's robust analytical and marketing efforts to support customer retention take hold. Debt-to-RMR leverage over the ratings horizon will hold within a band of 25 to 28 times, strong relative to most other rated alarm monitoring companies.Moody's views Monitronics' liquidity as adequate. The company as of early 2021 continues to have a small amount of cash on hand and ample availability under the $145 million revolver that, we believe, provide adequate liquidity to meet the combined demands of growth initiatives and 3G conversion outlays. We expect steady-state free cash flow as a percentage of debt in the low-single-digits, a marked improvement over the negative levels of the last three years. Liquidity is supported by the standard industry assumption that an alarm monitor can curtail the active subscriber acquisition programs in order to free up funds.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Monitronics can maintain improving operating trends, including revenue growth, and if liquidity and free cash flow improve. The ratings could be downgraded if revenue growth turns significantly negative, or if Monitronics' liquidity position deteriorates.Doing business as Brinks Home Security, Monitronics International, Inc. provides alarm monitoring services to nearly 940,000 (as of December 31, 2020) mainly residential customers in the U.S. and Canada. Moody's expects the company will generate 2021 revenue of about $530 million, a 5% improvement over 2020.The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Kevin Stuebe Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Karen Nickerson Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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