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Rating Action:

Moody's affirms ADT's B1 CFR and other credit ratings; outlook revised to positive from stable on favorable operating trends, improved liquidity

30 Sep 2022

Approximately $10.2 billion of rated debt

New York, September 30, 2022 -- Moody's Investors Service ("Moody's") affirmed Prime Security Services Borrower, LLC's ("ADT") B1 corporate family rating ("CFR"), its B1-PD probability of default rating ("PDR"), and the Ba3 and B3 instrument ratings assigned to the alarm monitoring company's first- and second-lien debt, respectively. Moody's also assigned a Ba3 instrument rating to ADT's $600 million, five-year senior secured, first-lien Term Loan A, the proceeds of which are required to redeem a portion of ADT's $700 million, 4.125% senior secured notes due 2023 (issued at The ADT Security Corporation subsidiary level), which became a current obligation as of June 30th. As a result of the anticipated near-term liquidity relief provided by the new term loan, Moody's has changed ADT's speculative grade liquidity assessment to SGL-2, from SGL-3, reflecting an improved and good liquidity profile. The outlook at ADT has been changed to positive, from stable, and a positive outlook has been assigned to co-borrower The ADT Security Corporation.

Because ADT has addressed the June 2023 maturity of the senior secured notes (the company anticipates using cash to satisfy the $100 million balance remaining after Term Loan A proceeds have been applied), and because private equity influence has been declining steadily as a result of multiple steps taken by the company, including the recently announced, $1.2 billion equity investment by State Farm Insurance, governance considerations are a driver of today's rating action.

Ratings Assigned:

..Issuer: Prime Security Services Borrower, LLC

...Senior Secured 1st Lien Term Loan due 2027, assigned Ba3 (LGD3)

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/Debentures, Affirmed from Ba3 (LGD3)

Upgrades:

..Issuer: Prime Security Services Borrower, LLC

....Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3

Outlook Actions:

..Issuer: Prime Security Services Borrower, LLC

....Outlook, Changed to Positive from Stable

..Issuer: The ADT Security Corporation

Â….Outlook, Assigned Positive from NOO

RATINGS RATIONALE

ADT's B1 CFR reflects its leading position in the US residential alarm-monitoring and home automation services market, positive operating trends including a diversifying revenue base that Moody's expects will have nearly double-digit percentage growth through 2023, and diminishing influence by private equity ("PE") owners Apollo Global Management, Inc. ("Apollo"). ADT plans to use proceeds from the State Farm investment to buy shares held by Apollo, which had a 67.5% ownership stake in ADT as of December 31, 2021. Depending on how many of its shares Apollo sells, its stake could drop to as low as 52% as a result of the transaction. Although the majority-PE ownership structure continues to weigh ADT's ratings, this most recent divestment provides more evidence that ADT may be inclined to adopt less aggressive financial strategies, supporting the positive outlook.

Moody's expects solid 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 ADT's push over the last 18 months to spend heavily on customer acquisitions. In addition to its purchasing a 15% stake, State Farm will make an incremental $300 million infusion for product development at ADT. Coincident with State Farm's investment, minority owner Google, Inc. ("Google," a subsidiary of Alphabet Inc., Aa2 stable) has agreed to commit an incremental $150 million, also towards product and technology development that is complementary to the applications State Farm envisions, such as advances in leak detection, and carbon monoxide and smoke detection. With State Farm building upon the existing Google relationship, not only will the companies help ADT provide more predictive and preventative home security services, but Moody's also expects that their market presence will support ADT's sales and marketing efforts and strengthen customer loyalty. Reducing high levels of attrition is a key factor for driving greater profitability. 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 and first-half 2022 will abate, and Moody's anticipates revenue growth for 2023 to ease to 10% or lower.

Moody's anticipates moderate, steady improvements in operating metrics over the next 12 to 18 months. In addition to healthy revenue growth, attrition should ease to about 12.5%, from near 13% currently, while cost multiples slowly improve as a result of marketing support from strategic relationships. Leverage measures should improve, with debt-to-RMR (recurring monthly revenue) easing from high-20xs currently to about 25x by late 2023, and steady state free cash flow (SSFCF) as a percentage of debt approaching double digits, from just under 7% as of June 30, 2022.

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 PDR, and the Loss Given Default assessments for the individual debt instruments. The Ba3 ratings on ADT's $2.74 billion first-lien term loan, $575 million first-lien revolver, and $5.5 billion of first-lien notes are (held collectively at ADT and The ADT Security Corporation) weakly positioned given the heavy 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 formerly 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 CFR itself. Thus, 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, any incremental first-lien debt issuance or similar reduction in subordinated debt could lead to ADT's first-lien debt being downgraded one notch, from Ba3 to B1, in line with the CFR.

The revision of ADT's SGL rating to SGL-2 from SGL-3 reflects the commitment by its lenders to provide, by March 15, 2023, a $600 million, senior secured first-lien term loan whose proceeds will be used to pay down a portion of its $700 million senior secured notes that recently had become a current obligation. The SGL-2 liquidity assessment reflects the anticipated elimination of that obligation, modest but growing balance sheet cash, and Moody's expectations for nearly full availability under ADT's $575 million revolving credit facility and for roughly $200 million in free cash flow in 2022. The good liquidity profile also reflects Moody's expectation 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, to generate additional liquidity, if necessary.

The positive outlook reflects Moody's anticipation that if ADT's primary operating metrics -- revenue, attrition, creation multiples, steady-state-free-cashflow to debt leverage, and debt/RMR leverage – continue to improve over the next 12 to 18 months while the company adopts more balanced financial strategies, including an emphasis upon financial leverage reduction rather than shareholder returns or debt-financed acquisitions, ADT's credit profile would be improved. Moody's assumes that no dividend recapitalizations or large, debt-funded acquisitions will be made.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Moody's expects diminishing PE ownership, if ADT can sustain recent operating momentum and maintain debt-to-RMR leverage below 30 times, and if Moody's anticipates that SSFCF as a percentage of debt will hold in the high-single digits. Moody's would also expect healthy revenue growth on a diversifying platform, as strategic partnerships with the likes of Google and State Farm help broaden and deepen ADT's products' and services' appeal to customers.

The positive outlook indicates that ratings downgrades are unlikely over the next 12 to 18 months. Over the longer term, however, the ratings could be downgraded if ADT's debt-to-RMR is sustained above 30x, if SSFCF-to-debt falls toward mid-single-digit percentages, or if at least mid-single digit percentage revenue growth fails to materialize over the next 12 to 18 months.

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.

ADT Inc. (NASDAQ:ADT), headquartered in Boca Raton, FL, is the largest provider of security, interactive automation and monitoring services, with about 6.7 million residential (primarily) and business customers, plus independent security-alarm dealer customers on a wholesale basis. Moody's expects the company's 2022 total monitoring, services, and equipment-installation revenue to be about $6.2 billion, a more than 15% increase from 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.

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

No Related Data.
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