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Monitronics International Inc – Brinks Home Operator Files for Bankruptcy for Second Time in Under Four Years; Will Look to Shed a Further $500mn of Debt with Holders of Takeback Debt in 2019 Bankruptcy Set to Own Company at End of June Emergence

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May 14, 2023 – Monitronics International Inc and nine affiliated debtors (dba "Brinks Home," together “Monitronics” or the “Debtors”) filed for Chapter 11 protection (on a "partially prepackaged" basis) with the U.S. Bankruptcy Court in the Southern District of Texas, lead case No. 23-90332 (Judge TBD). The Dallas-Fort Worth based Debtors, "one of the largest home security and alarm monitoring companies in North America," are represented by Timothy A. Davidson II of Hunton Andrews Kurth LLP. Further Board authorized appointments include: (i) Latham & Watkins LLP as general bankruptcy counsel, (ii) Alvarez & Marsal as financial advisors, (iii) PJT Partners LP as investment bankers and (iv) Kroll Restructuring Administration, LLC as claims agent. As is customary with prepackaged Plans, the Debtors have filed a motion seeking a hearing at which they will ask for both approval of the Disclosure Statement and confirmation of the Plan (requested date is June 26th) and also looking to waive requirements that they file SOFAs/Schedules A&B; and hold a meeting of unsecured creditors [Docket No. 19].

Also engaged are Davis Polk & Wardwell LLP and Evercore Group, L.L.C. as counsel and investment banker, respectively, to the ad hoc group of lenders.

UPDATE: On May 16th, the Court hearing the Monitronics International cases issued an order approving: (i) Plan solicitation and voting procedures in respect of the prepackaged Plan, (ii) waiving, inter alia, SOFA/Schedules/creditors' meeting requirements and (iii) a June 26th combined hearing [Docket No. 68]. 

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $500.0mn and $10.0bn; and estimated liabilities between $500.0mn and $1.0bn ($1.09bn of funded debt). Documents filed with the Court list the Debtors’ four largest unsecured creditors as (i) Cortland Capital Markets Services LLC (in respect of $793.7mn credit facility claim), (ii) Encina Private Credit SPV, LLC ($in respect of $294.4mn credit facility claim), (iii) Sunnova Energy Corporation ($undetermined trade debt claim) and (iv) Alarm.com ($21.4mn trade debt claim).

On August 30, 2019, the Debtors emerged from an earlier bankruptcy, also "partially" prepackaged and also in the U.S. Bankruptcy Court in the Southern District of Texas, lead case No. 19-33650. At exit from their 2019 bankruptcy, the Debtors, who had been forced to seek bankruptcy shelter by unsustainable debt servicing levels and the challenges of keeping up with evolving technologies, heralded the elimination of $885.0mn of debt and noted that they "had entered a new era of growth" with EQT Partners and Brigade Capital Management as their largest shareholders.

Not much has changed, with Debtors tweaking only slightly their mea culpa this time around, noting that: "despite having significantly de-levered the balance sheet, the Debtors continued to face challenges owing in part to the Debtors’ existing business model at the time of emergence [in 2019]. In addition to high attrition rates and generating lower than optimal recurring monthly revenue, the Debtors’ business model at the time required significant up-front costs in order for the Debtors to continuously acquire new customer accounts at the pace necessary to sustain operations and service debt in the short-term, which was not compatible with the Debtors’ funded debt obligations in the long term…the Company still carries significant funded debt obligations, and servicing those obligations has negatively impacted liquidity."

Filing Day Highlights

  • Debtors dba "Brinks Home" File Chapter 11 for the Second Time in Under Four Years with $1.09bn of Secured Debt
  • Having Shed $885.0mn (Same Court, and Also "Partially" Prepacked) in 2019, Debtors Now Look to Shave a Further $500.0mn
  • Debtors Again Cite Business Model Shortcomings and Unsustainable Debt Levels
  • RSA Has Debtors Owned by Holders of 2019 Takeback Debt at Emergence to Occur by End of June
  • Trade Creditors and General Unsecureds to be Made Whole, Equity to Share $3.0mn Pool (or Pro rata Share of 4.65% of the New Common Equity)

2023 RSA Press Release

In a May 8th press release announcing entry into a restructuring support agreement {the "RSA') and their intention to file for bankruptcy by May 15th, the Debtors noted that they had: “entered into a Restructuring Support Agreement ('RSA') with (i) lenders holding approximately 78% of the Company’s outstanding funded debt and (ii) holders of a majority of the Company’s equity to support an expedited restructuring that would reduce Monitronics’ debt by approximately $500 million and provide increased financial flexibility to the Company as it continues to deliver profitable growth. The current lenders under the Company’s 2019 takeback term loan facility, including funds managed by Monarch Alternative Capital LP ('Monarch') and Invesco Senior Secured Management, Inc. ('Invesco') as the largest lenders, will become the new principal equity owners of Monitronics, providing the Company with additional support to execute on its business plan.

The Company intends to implement the pre-negotiated restructuring contemplated by the RSA through a partially pre-packaged plan of reorganization effectuated through voluntary chapter 11 cases in the U.S. Bankruptcy Court for the Southern District of Texas to be commenced on or around May 15, 2023. Pursuant to the RSA, the Company has already obtained the requisite support from its stakeholders to confirm the plan of reorganization (the 'Plan'), and the Company expects to achieve Bankruptcy Court approval of the Plan and emerge from chapter 11 within approximately 46 days of filing.“

The Debtors CEO William Niles added: "We are pleased to have reached an agreement with our lenders and shareholders to create a capital structure that is right-sized for our business model. Our new balance sheet will provide sufficient liquidity to grow our subscriber base at attractive returns and generate levered free cash flow.”

Summary of RSA and Prepackaged Plan

The Debtors Disclosure Statement provides: "The Restructuring contemplates the following transactions:

  • pursuant to the Plan, a reduction of the Debtors’ pro forma total debt from approximately $1.09 billion as of the Petition Date to $600 million upon emergence under a new term loan credit facility (the 'New Exit Facility') as described herein;
  • under the Plan, the Debtors’ stakeholders receive treatment as follows:
    • each Holder of claims under the 2019 Takeback Term Loan Credit Agreement (the '2019 Takeback Term Loan Claims') totaling approximately $794 million in principal amount as of May 9, 2023, will receive (a) its pro rata share of Equity Subscription Rights to subscribe for and purchase New Common Equity pursuant to the Equity Rights Offering in accordance with the Rights Offering Procedures as further described herein, (b) its pro rata share of Debt Funding Rights to fund New Exit First-Out Term Loans pursuant to the Debt Rights Offering in accordance with the Rights Offering Procedures as further described herein, (c) its pro rata share of 100% of the New Common Equity, subject to dilution by New Common Equity issued pursuant to the Equity Rights Offering (including the Backstop Commitment Agreement), Class 7 Equity Elections, and the Post-Emergence Incentive Plan, and (d) New Exit Facility Term Loans in principal amount equal to its pro rata share of the Distributable New Exit Facility Amount, distributed in the form of either New Exit First-Out Term Loans or New Exit Second-Out Term Loans based upon participation in the Equity Rights Offering and Debt Rights Offering;
    • claims under the 2019 Exit Facility Credit Agreement (the '2019 Exit Facility Claims') will be repaid in full in Cash with the proceeds of the DIP Facility;
    • Other Secured Claims, General Unsecured Claims, Intercompany Claims, and Affiliate Equity Interests in any Monitronics Subsidiary are Unimpaired by the Plan as further described herein; and
    • each Holder of Monitronics Equity Interests will receive either (a) its pro rata share of $3,000,000 (the 'Class 7 Cash Pool') or (b) solely to the extent that such Holder timely and validly makes the Class 7 Equity Election on the Class 7 Equity Election Form, such Holder’s pro rata share of 4.65% of the New Common Equity to be issued and outstanding as of the Effective Date, subject to dilution by New Common Equity issued pursuant to the Post-Emergence Incentive Plan (the “Class 7 Equity Pool”).
  • the Debtors will enter into a superpriority secured postpetition debtor-in-possession financing facility (the “DIP Facility” and, the lenders thereunder, the “DIP Lenders”), participation in which shall be offered to all Consenting 2019 Takeback Term Loan Lenders and backstopped by the Ad Hoc Lender Group (as defined below), in an aggregate principal amount of $398,610,000 (inclusive of upfront fees paid-in-kind), the proceeds of which will be used to refinance the 2019 Exit Facility Claims, pay certain fees associated with the closing of the DIP Facility and to provide liquidity to the Debtors’ balance sheet, and which will consist of (a) Tranche A DIP Facility Term Loans in an aggregate principal amount of approximately $299 million and (b) Tranche B DIP Facility Term Loans in an aggregate principal amount of $100 million, in each case, on the terms and conditions set forth in the DIP Facility Loan Documents (as defined in the Plan) and which will receive the following treatment under the Plan on the Effective Date:
    • all accrued and unpaid interest on the DIP Facility Term Loans shall be paid in Cash;
    • each DIP Facility Lender may elect to (i) apply such DIP Facility Lender’s Tranche A DIP Term Loans and Exit Fee (as defined in the DIP Credit Agreement) to its funding obligations in respect of the Debt Rights Offering and/or (ii) apply such DIP Facility Lender’s Tranche B DIP Term Loans to its funding obligations in respect of the Equity Rights Offering (including Backstop Commitments), in each case, in accordance with the Plan and the Rights Offering Procedures;
    • all outstanding principal amounts on account of the Tranche A DIP Term Loans and the Exit Fee, after giving effect to the application of amounts in satisfaction of the Debt Rights Offering funding obligations described above, shall be repaid in Cash from a pro rata share of 100% of the Cash proceeds of the Debt Rights Offering, with any remaining unpaid amounts to be converted into an equivalent principal amount of New Exit First-Out Term Loans; and
    • all outstanding principal amounts on account of the Tranche B DIP Term Loans, after giving effect to the application of amounts in satisfaction of Equity Rights Offering funding obligations described above, shall be repaid in full in Cash from the Cash proceeds of the Equity Rights Offering and other available Cash;
  • the Debtors will commence an offering (the 'Equity Rights Offering') of subscription rights (the 'Equity Subscription Rights') to purchase, in the aggregate, 69.44% of the total units of New Common Equity to be issued and outstanding as of the Effective Date, subject to dilution by the Post-Emergence Incentive Plan (as defined in the Plan), for an aggregate purchase price of $100 million, participation in which will be available to all Holders of 2019 Takeback Term Loan Claims who participate in the Debt Rights Offering (and as otherwise provided in the Rights Offering Procedures and the Plan), and which will be backstopped by the Ad Hoc Lender Group, in accordance with the terms and conditions set forth in the Restructuring Support Agreement and the Backstop Commitment Agreement (attached hereto as Exhibit C); and
  • the Debtors will commence an offering (the 'Debt Rights Offering') of rights ('Debt Funding Rights') to fund New Exit First-Out Term Loans in the aggregate principal amount of $301,596,100, participation in which will be available to all Holders of 2019 Takeback Term Loan Claims.

The Restructuring proposed by the Debtors will provide substantial benefits to the Debtors and all of their stakeholders. The Restructuring will leave the Debtors’ businesses intact and substantially de-levered, providing for the reduction of approximately $500 million of debt upon emergence. This de-leveraging will enhance the Debtors’ long-term growth prospects and competitive position and allow the Debtors to emerge from the Chapter 11 Cases as reorganized entities better positioned to withstand the competitive security and alarm services industry."

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms, not otherwise defined below, are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):

  • Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 2 (“2019 Exit Facility Claim”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 3 (“2019 Takeback Term Loan Claim”) is impaired and entitled to vote on the Plan. Expected recovery is 39%FN2. Each holder shall receive (i) such Holder’s Pro Rata share of (A) the Debt Funding Rights, (B) the Equity Subscription Rights, and (C) the Class 3 Equity Distribution; and (ii) New Exit Facility Term Loans in a principal amount equal to such Holder’s Pro Rata share of the Distributable New Exit Facility Amount, which shall be in the form of (A) with respect to each Class 3 Participating Holder, New Exit First-Out Term Loans and (B) with respect to each Class 3 Non-Participating Holder, New Exit Second-Out Term Loans.
  • Class 4 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 5 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 6 (“Affiliate Equity Interests in any Monitronics Subsidiary”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 7 (“Monitronics Equity Interests”) is impaired and entitled to vote on the Plan. Each holder shall receive either: (i) such Holder’s Pro Rata share of the Class 7 Cash Pool [ie $3.0mn], or (ii) solely to the extent that such Holder timely and validly makes the Class 7 Equity Election on the Class 7 Equity Election Form, such Holder’s Pro Rata share of the Class 7 Equity Pool.

FN2: The estimated recovery percentage for Class 3 is calculated based on outstanding principal and unpaid interest accrued as of May 15, 2023. The value of the Class 3 Equity Distribution is based on the Plan Equity Value of $240,000,000, which, for purposes of the Plan, is calculated as follows: (x) total enterprise value of the Reorganized Debtors of $800,000,000 (which amount has been agreed upon among the Debtors, the Consenting Lenders, and the Consenting Shareholders), less (y) the aggregate principal amount of the New Exit Facility as of the Effective Date (i.e., $600,000,000), plus (z) estimated pro forma Cash on hand as of the Effective Date of $40,000,000.

Key Definitions:

  • “Class 3 Equity Distribution” means 100% of the New Common Equity as of the Effective Date, subject to dilution by the New Common Equity issued pursuant to valid and timely Class 7 Equity Elections, the Equity Rights Offering (including the Backstop Commitment Agreement) and the Post-Emergence Incentive Plan.
  • “Class 7 Cash Pool” means Cash in an aggregate amount equal to $3,000,000.
  • “Class 7 Equity Pool” means 4.65% of the New Common Equity to be issued and outstanding as of the Effective Date, subject to dilution by the Post-Emergence Incentive Plan. For the avoidance of doubt, the New Common Equity issued under the Equity Rights Offering shall not be diluted by the New Common Equity issued from the Class 7 Equity Pool.
  • “Debt Funding Rights” means the rights to fund New Exit First-Out Term Loans in an aggregate principal amount equal to the Aggregate Debt Rights Offering Amount pursuant to the Debt Rights Offering in accordance with the Rights Offering Procedures.

Proposed Key Dates

  • Deadline to file Plan Supplement for the draft New LLC Agreement: June 9, 2023
  • Deadline to file Plan Supplement (other than the draft New LLC Agreement): June 12, 2023
  • Voting Deadline, Release Opt Out Deadline, and Equity Election Deadline: June 16, 2023
  • Objection Deadline for Plan and Disclosure Statement: June 16, 2023
  • Combined Hearing: June 26, 2023

Terms of Exit Facility [documentation filed at Exhibit E of Docket No. 7]. 

  • Borrower: Monitronics International, Inc., a Delaware corporation
  • Exit Term Loan Administrative Agent: Alter Domus (US) LLC (in its capacity as administrative agent under the Exit Term Loan Facilities, the “Exit Term Loan Administrative Agent”).
  • Exit Term Lenders: Prepetition Takeback Lenders (or their related funds) and, to the extent the Debt Rights Offering Proceeds are insufficient to repay the Tranche A DIP Term Loans in full in cash, certain of the Tranche A Lenders owed such obligations (collectively, the “Exit Term Lenders”).
  • Exit Term Loan Facilities: The Exit Term Lenders will provide, or be deemed to provide, to the Borrower a senior secured, first lien term loan credit facility (the term loan facilities thereunder, “Exit Term Loan Facilities”, and the loans thereunder, the “Exit Term Loans”) in an aggregate principal amount of up to $600 million, consisting of (i) new first-out term loans (the “First-Out Term Loans” and “First-Out Term Facilities”) distributed on account of (A) the Consent Premiums and Fees (as defined in the Approved Plan), (B) the Debt Rights Offering, (C) the refinancing of the Tranche A DIP Term Loans in accordance with the Approved Plan and (D) Allowed 2019 Takeback Term Loan Claims held by Class 3 Participating Holders (as defined in the Approved Plan) and (ii) new second-out term loans (the “Second-Out Term Loans” and “Second-Out Term Facilities”) distributed on account of Allowed 2019 Takeback Term Loan Claims held by Class 3 Non-Participating Holders (as defined in the Approved Plan), in each case, to be issued in accordance with the Approved Plan and the Restructuring Support Agreement.
  • Maturity Date: The First-Out Term Loans will mature on the date that is five years after the Closing Date. The Second-Out Term Loans will mature on the date that is five years and six months after the Closing Date.
  • Interest Rate(s): The interest rate applicable to the First-Out Term Loans will be Term SOFR (SOFR floor of 3.00%) plus 0.26161% CSA plus 7.50%, all payable in cash. The interest rate applicable to the Second-Out Term Loans will be Term SOFR (SOFR floor of 1.50%) plus 0.26161% CSA plus 3.00%, all payable in kind.
  • Default Rate: Any principal or interest payable under or in respect of the Exit Term Loans not paid when due shall bear interest at the applicable interest rate plus 2.00% per annum. Other overdue amounts shall bear interest at the interest rate applicable to ABR loans plus 2.00% per annum.

Goals of the Chapter 11 Filing

The Niles Declaration [Docket No.10] provides: "These Chapter 11 Cases are consensual, partially 'prepackaged' cases commenced for the purpose of implementing an agreed restructuring of the Debtors’ funded debt obligations, and both the Chapter 11 Cases and the Plan are supported, through the Restructuring Support Agreement (as defined below), by a significant majority of Holders in the only two impaired classes under the Plan (2019 Takeback Term Loan Claims and Monitronics Equity Interests). The Chapter 11 Cases also contemplate paying all trade creditors – which are vital to the Debtors’ reorganization – in the ordinary course of business, and provide that all unsecured creditors will be either paid in full or otherwise unimpaired under the Plan."

Events Leading to the Chapter 11 Filing

The Debtors' Disclosure Statement provides: "In the months following their exit from the 2019 Chapter 11 Cases, despite having significantly de-levered the balance sheet, the Debtors continued to face challenges owing in part to the Debtors’ existing business model at the time of emergence. In addition to high attrition rates and generating lower than optimal recurring monthly revenue, the Debtors’ business model at the time required significant up-front costs in order for the Debtors to continuously acquire new customer accounts at the pace necessary to sustain operations and service debt in the short-term, which was not compatible with the Debtors’ funded debt obligations in the long term….

the Company still carries significant funded debt obligations, and servicing those obligations has negatively impacted liquidity. To address liquidity needs, in September 2021, the Company explored options to raise capital to refinance its existing credit facilities and/or extend maturities while simultaneously engaging with a potential lender for a new term loan and revolving credit facility. On October 7, 2021, the Company launched an offer for $1.1 billion in seven-year Senior Secured First Lien Notes due 2028 at a yield of approximately 10% in a private placement. While the notes offering garnered some support, weaknesses in the U.S. bond market at the time elevated investor concerns regarding the Debtors’ high debt load and ultimately led to insufficient support for the notes offering to proceed. Without the necessary capital to repay existing credit facilities, the Debtors were unable to advance discussions regarding new credit facilities. The Debtors have also struggled to enhance their liquidity position through cash generation as a result of interest rate hikes in late 2021, which have further constrained the Debtors’ free cash flows. The Company has implemented temporary solutions to reduce strains on liquidity, including, for instance, by monetizing assets through the sale of substantially all of their Canadian customer accounts and terminating certain in the-money interest swaps. Faced with upcoming debt maturities, however, the Company determined that it was in the best interest of its business, as well as all of its stakeholders, to explore more holistic alternatives to reduce their leverage and provide a long-term solution to near-term liquidity constraints."

Prepetition Indebtedness

As of the Petition date, the Debtors have approximately $1.09bn in aggregate debt outstanding (excluding accrued interest) under their prepetition credit facilities, which were entered into in connection with the Debtors’ emergence from the 2019 Chapter 11 Cases. The following chart summarizes the Debtors’ significant funded debt obligations as of the Petition Date. Those facilities were approved by the plan confirmation order in August 2019, which included provisions stating, among other things, that the liens and obligations thereunder were validly created and enforceable.

Key Documents

The Disclosure Statement attaches the following documents:

  • Exhibit A:  Plan
  • Exhibit B: Restructuring Support Agreement
  • Exhibit C: Backstop Commitment Agreement
  • Exhibit D: DIP Commitment Letter
  • Exhibit E: New Exit Facility Term Sheet
  • Exhibit F: Organizational Structure Chart
  • Exhibit G: Liquidation Analysis
  • Exhibit H: Financial Projections

Liquidation Analysis (see Exhibit G to Disclosure Statement for notes)

About the Debtors

According to the Debtors: “Monitronics is one of the largest home security and alarm monitoring companies in North America. Headquartered in the Dallas-Fort Worth area, Monitronics provides platinum-grade protection to over 800,000 residential and commercial customers through highly responsive, simple security solutions backed by expertly trained professionals. The company has one of the nation’s largest networks of independent authorized dealers and agents — providing products and support to customers in the U.S. and Puerto Rico — as well as professionally installed products. “

Corporate Structure Chart

 

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