Moody’s, S&P rate Monitronics debt

SSN Staff  - 
Monday, September 1, 2003

DALLAS - Two well-known ratings firms released reports on Monitronics International’s debt last month. The results, however, were mixed, as Moody’s gave a “stable” rating, while S&P gave a “negative” rating to the company based on its $525 million in outstanding credit facilities.

The Moody’s rating was based on what it said was the competitive nature of the alarm monitoring business, naturally high customer and dealer churn rates, potential for increased price-based competition and the company’s high leverage. Moody’s also considered Moni-tronics’ high margins, low capital expenditures and attractive business strategy in its rating.

As a positive, Moody’s pointed to the company’s free cash flow of more than $50 million, as of June 30. This compares favorably with capital expenditure requirements of only about $2 million during that same time.

The S&P report, on the other hand, highlighted Monitronics’ high customer-acquisition costs, which have averaged more than 75 percent of the company’s total revenues over the last three years as it has battled attrition rates of about 12 percent annually.

“We see customer-acquisition costs as an essential part of Monitronics’ business,” said S&P credit analyst Edward O’Brien. “We expect internal cash flow to be sufficient to fund these customer account purchases to offset attrition, but growth will continue to be debt-financed.”

Despite the negative rating, S&P did point out that attrition rates have slowed in recent years and that industry growth trends remain favorable.

For the quarter ending March 31, Monitronics posted net income of $128 million and pro froma debt of about $375 million.