Prime Security Services Borrower, LLC -- Moody's affirms ADT's B1 CFR, Ba3 and B3 secured debt ratings on positive operating trends, despite diminished liquidity; outlook stable

Rating Action: Moody's affirms ADT's B1 CFR, Ba3 and B3 secured debt ratings on positive operating trends, despite diminished liquidity; outlook stableGlobal Credit Research - 17 Aug 2022Approximately $10.2 billion of rated debtNew York, August 17, 2022 -- Moody's Investors Service ("Moody's") affirmed Prime Security Services Borrower, LLC's (dba ADT) B1 corporate family rating (CFR), its B1-PD probability of default rating, and the respective Ba3 and B3 instrument ratings on the residential alarm monitoring company's first- and second-lien debt. However, given the pressures on ADT's liquidity as a result of $700 million of first-lien notes becoming a current obligation on its balance sheet as of June 30th, Moody's has changed ADT's speculative grade liquidity rating to SGL-3, from SGL-2, reflecting an adequate liquidity profile. The outlook remains stable.Because in Moody's view ADT's management has effectively chosen to allow the notes to become a current liability, governance considerations are a driver of this action.Ratings Affirmed:..Issuer: Prime Security Services Borrower, LLC....Corporate Family Rating, Affirmed B1....Probability of Default Rating, Affirmed B1-PD....Senior Secured 1st lien Revolving Credit Facility, Affirmed Ba3 (LGD3)....Senior Secured 1st lien Term Loan due 2026, Affirmed Ba3 (LGD3)....Senior Secured 1st Lien Regular Bond/Debenture, Affirmed Ba3 (LGD3)....Senior Secured 2nd lien Regular Bond/Debenture, Affirmed B3 (LGD6)..Issuer: The ADT Security Corporation....Senior Secured 1st Lien Regular Bond/Debenture, Affirmed Ba3 (LGD3)Changed:..Issuer: Prime Security Services Borrower, LLC....Speculative Grade Liquidity Rating, Changed to SGL-3, from SGL-2Outlook Actions:..Issuer: Prime Security Services Borrower, LLC....Outlook, Remains StableRATINGS RATIONALEADT's B1 CFR reflects its leading position in the US residential alarm-monitoring and home automation services market, and from positive operating trends, including revenue diversification and anticipated acceleration in monitoring revenue through 2022. Moody's expects revenue growth of roughly 15% in 2022, to about $6.2 billion, as a result of higher pricing and customers choosing more interactive services, as well as a push in 2021 to spend heavily on customer acquisitions. A new, fast-growing solar unit will support revenue growth as well, with the segment representing about 15% of total revenue this year, although it will be a drag on earnings initially. Heavy growth spending from 2021 is abating, and Moody's anticipates revenue growth for 2023 to ease to below 10%.ADT has weaker liquidity as a result of the designation of $700 million of first-lien notes as a current liability, a large obligation relative to less than $50 million of June 30th balance sheet cash, just under $500 million availability under the revolving credit facility, and Moody's expectation for roughly $200 million in Moody's-adjusted free cash flow in 2022. Credit market conditions through the summer of 2022 have presented economically unattractive opportunities for refinancing The ADT Security Corporation's $700 million, 4.125% first-lien notes, which mature in June 2023. While Moody's thinks the company could readily refinance them, albeit at a higher coupon, Moody's also believes the company is waiting for a more opportune time to do so. Additionally, while expected cash and revolver availability by the end of 2022 might be just enough to satisfy the maturity of the notes, by mid-April of 2023 an additional, $750 million of 5.25% first-lien notes will become a current obligation as well, which would put a severe strain on liquidity. In the light of the very large resultant current obligation posed by the 4.125% first-lien notes (which represented nearly 7% of ADT's more than $10 billion of total debt as of June 30, 2022), ADT's liquidity is weakened, but this is due to a practical technicality rather than to operational weakness. As such, Moody's has lowered its liquidity assessment by only one notch.Ongoing efforts to delever combined with robust operating growth will help the company sustain debt-to-RMR (recurring monthly revenue) comfortably below 30 times, a strong level for the B1 CFR. However, Moody's views ADT's commitment to maintaining conservative financial policies as an important credit consideration. Private equity sponsor Apollo's large-majority ownership in the company will need to decline meaningfully before we can be comfortable that ADT is likely to put creditors' concerns before those of shareholders. Adequate liquidity, in the forms of positive, GAAP-based free cash flow and the large, $575 million revolving credit facility (which Moody's expects to be minimally drawn by year-end) that is supplemented by a receivables-securitization facility, also support ADT's ratings. Furthermore, as with alarm monitoring companies in general, Moody's assumes that ADT can both curtail its active subscriber acquisition program and turn to the alarm monitoring industry's robust market for trading alarm monitoring contacts, in order to generate additional liquidity.The stable outlook assumes the successful, timely refinancing of the 4.125% first-lien notes, plus sponsor Apollo's continued elevated ownership interest in the company and the governance risks that ownership stake implies. Moody's expects ADT's primary operating metrics -- revenue, attrition, creation multiples, steady-state-free-cashflow to debt leverage, and debt/RMR leverage – to improve moderately over the next 12 to 18 months.STRUCTURAL CONSIDERATIONSAll of ADT's debt is secured on either a first- or second-lien basis. The ratings for the individual debt instruments incorporate ADT's overall probability of default, reflected in the B1-PD, and the Loss Given Default assessments for individual instruments. The Ba3 ratings on ADT's $2.8 billion first-lien term loan, $575 million first-lien revolver, and $5.5 billion of first-lien notes are weakly positioned given the increased preponderance of first-lien debt relative to debt subordinated to it ($1.3 billion of B3-rated second-lien notes) in the company's capital structure. In the past few years ADT has steadily reduced the amount of debt subordinated to first-lien debt, resulting in a large preponderance of debt now being first lien. As there is no longer a sufficient amount of subordinated debt that heretofore had been providing ratings support or "cushion" for the first-lien debt, the first-lien debt's credit riskiness has been aligning more closely with ADT's B1 CFR itself. However, Moody's continues to believe that ADT's ongoing improvements in operating metrics – including one or two that fall within our CFR upgrade triggers – suggest that a Ba3 instrument rating continues to reflect the credit risk inherent in the first-lien debt, as the overall credit profile improves. The respective one-notch-above- and two-notches below-differential for the first- and second-lien debt ratings relative to the CFR reflects the proportion of first-lien debt versus debt subordinated to it in the capital structure. However, Moody's notes that any incremental first-lien debt issuance or similar reduction in subordinated debt will likely cause ADT's first-lien debt stack to be downgraded from Ba3 to B1, in line with the CFR.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if ADT can sustain recent operating momentum and maintain debt-to-RMR leverage below 30 times, and if Moody's anticipates that private-equity ownership in the company will approach 50% or less.The ratings could be downgraded if Moody's has diminished confidence in the company's ability to refinance its upcoming debt maturities; if additional dividend recapitalizations or large debt-funded acquisitions are made; if debt-to-RMR is sustained above 35 times, or if FCF-to-debt falls to the low-single-digit percentages.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/356424. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Headquartered in Boca Raton, FL, Prime Security Services Borrower, LLC (dba ADT; NYSE: ADT) is a leading provider of security, interactive automation, and monitoring services for approximately 6.7 million residential (primarily) and business customers, and for independent security-alarm dealers on a wholesale basis (excluded from the 6.7 million count). The company is the product of a May 2016, Apollo-backed combination of alarm monitors Protection 1 (P1) and The ADT Security Corporation. We expect the company's 2022 total monitoring, services, and equipment-installation revenue to be at least $6.1 billion, a better than 15% improvement relative to 2021.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 on https://ratings.moodys.com/rating-definitions.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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.At least one ESG consideration was material to the credit rating action (s) announced and described above.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 https://ratings.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 https://ratings.moodys.com.Please see https://ratings.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 issuer/deal page on https://ratings.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 Andrea Usai 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 © 2022 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. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​