Research: Rating Action: Moody’s affirms ADT’s B1 CFR, Ba3 and B3 secured debt ratings on positive operating trends, despite diminished liquidity; outlook stable

Approximately $10.2 billion of rated debt

New 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-2

Outlook Actions:

..Issuer: Prime Security Services Borrower, LLC

….Outlook, Remains Stable

RATINGS RATIONALE

ADT’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 CONSIDERATIONS

All 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 RATINGS

The 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 DISCLOSURES

For 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.

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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.

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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
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JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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