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Rating Action:

Moody's downgrades Vivint's first-lien debt to B2; affirms B3 CFR

23 Apr 2019

Nearly $2.8 billion of rated debt affected

New York, April 23, 2019 -- Moody's Investors Service ("Moody's") downgraded alarm monitor APX Group, Inc.'s (dba "Vivint") first-lien debt ratings to B2 (LGD3), from B1 (LGD3), including $900 million of senior secured notes maturing 2022, and an $808 million senior secured term loan. Moody's also assigned a B2 (LGD3) rating to a new $250 million first-lien senior secured notes issuance maturing 2024, all of the proceeds of which, after transaction fees and expenses, will be used to pay down an equivalent portion of 8.75% senior unsecured notes due 2020. In conjunction with these rating actions, Moody's affirmed the Caa2 (LGD5) ratings on these senior unsecured notes, which mature in 2020 and 2023. Moody's also affirmed Vivint's B3 Corporate Family Rating ("CFR") and its SGL-3 Speculative Grade Liquidity Rating, indicating adequate liquidity. The outlook is stable.

Moody's took the following actions on APX Group, Inc.:

Downgrades:

. First-lien senior secured term loan and notes, Downgraded to B2 (LGD3) from B1 (LGD3)

Assignments:

. Senior secured first-lien notes, maturing 2024, Assigned B2 (LGD3)

Affirmations:

.... Probability of Default Rating, Affirmed B3-PD

.... Corporate Family Rating, Affirmed B3

.... Senior unsecured regular bond/debentures, maturing 2020 and 2023, Affirmed Caa2 (LGD5)

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

Outlook Actions:

....Outlook, Remains Stable

RATINGS RATIONALE

As in past refinancings, the last one in August 2018, Vivint's announcement to replace high-coupon, near maturing unsecured debt with less expensive, later maturing secured debt is a positive credit development. In addition to pushing out debt maturities, the move, which is leverage-neutral, saves the company nearly $2 million in annual interest expense. However, the now even greater preponderance of first-lien debt ($2.54 billion, including a $289 million super-priority revolver) relative to a lesser amount of unsecured debt ($839 million) in the capital structure dilutes the collateral position of first-lien lenders, and allows for less loss absorption cushion in the form of unsecured debt to support the first-lien debt in default. In Moody's loss-given-default ("LGD") analysis, as the quantum of any one family of debt grows in significance relative to other debt classes in a company's capital structure, that debt's rating will more closely mirror the company's overall CFR. As such, Vivint's first-lien debt is now rated B2, one notch above its B3 CFR, when previously the debt had been rated B1, two notches higher.

The B3 CFR ratings affirmation reflects Vivint's heavy reliance on debt capital markets for supporting growth, as well as Moody's expectation that Vivint will operate at persistently high debt-to-RMR ("recurring monthly revenue") levels of around 42 times, similar to other B3-rated alarm monitors. Continued rapid growth, with more new subscribers taking on a greater number of expensive smart-home devices, will support revenues, while increasing adoption of Vivint's Flex Pay program will ease the company's working capital burdens. The Flex Pay program provides third-party financing for customers (instead of Vivint) to pay for monitoring equipment. These actions have begun to reduce Vivint's historic need for large, periodic debt raises.

For the past several years, Vivint has taken on incremental debt in order to repay a portion of near-maturing debt, free up revolver borrowings, and provide liquidity to support subscriber growth initiatives -- all of which have contributed to steadily rising leverage. While revenue, RMR, and subscriber growth haven been consistent and strong -- considerably higher, in fact, than Vivint's alarm monitoring peers -- the cost of achieving that growth, even with the support of relatively favorable attrition rates of about 12.0%, has kept Moody's-adjusted debt-to-RMR leverage above 40 times.

Vivint had strong operating results through 2018, with 19% revenue growth and double-digit (non-retail) subscriber growth), and continued good momentum into the first quarter of 2019. Operations are supported by nearly 90% adoption rates (by new subscribers) of its Smart Home products, which generate clear industry-leading average RMR-per-subscriber metrics and typically have lower attrition rates.

The SGL-3 rating reflects Moody's expectations for adequate liquidity despite substantial growth-related cash flow shortfalls. This is based on our view that available liquidity sources adequately cover the funding necessary to maintain a stable subscriber base. Average balance sheet cash for Vivint has been, typically, de minimus. Because in practice Vivint will likely continue to invest in growth, a cash flow deficit is likely. The company has generated very large, albeit declining cash flow deficits from operations over the last few years (an annual average of more than $300 million) due to acquisition costs to generate subscriber growth. Last year's refinancings helped leave the revolver at its then-full $304 million capacity (a $15 million portion of the total revolver commitment expired on March 31, 2019). Moody's believes these cash sources should fund growth-related investments over the next 12 months. We typically evaluate an alarm monitor's liquidity by assuming that it can curtail the active subscriber acquisition programs in order to free up some liquidity. Without that option, most alarm monitoring companies' liquidity would be viewed as weak.

The stable outlook is supported by the highly predictable revenue streams that monitoring contracts provide, and by expectations for adequate liquidity despite substantial growth-related cash flow shortfalls. The outlook also reflects Moody's expectation that Vivint will continue to generate good subscriber growth and high-single-digit revenue growth over the next year while maintaining an adequate liquidity profile.

The ratings could be upgraded if Vivint sustains debt-to-RMR below 40-times, and free cash flow (before growth spending) to debt in the mid-single-digit percentages, while maintaining good liquidity with pool attrition rates at or better than industry averages. Diminished reliance on capital markets to support growth, liquidity, and debt amortization would also be necessary for an upgrade.

The ratings could be downgraded if: i) Moody's expects free cash flow (before growth spending) to turn negative for a prolonged period; ii) the company fails to maintain adequate liquidity; iii) attrition rates are expected to remain above 13%, or; iv) the company is unable to pro-actively and cost-effectively refinance impending debt maturities.

APX Group, Inc. (dba "Vivint") provides alarm monitoring and home automation services to more than 1.4 million residential subscribers in North America. With 2018 sales of nearly $1.1 billion (a 19% gain over 2017), Vivint is the second-largest provider of home security and automation services, well behind the combined P1/ADT. As the result of a late 2012 acquisition, Vivint is majority-owned by The Blackstone Group, while its management team has maintained a meaningful ownership stake.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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

No Related Data.
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