Outlook for My Alarm Center Ownership Post Bankruptcy
A proposed prepackaged restructuring under Chapter 11 would hand My Alarm Center’s equity to first-lien lenders.
A key aspect of My Alarm Center’s Chapter 11 restructuring to play out in the coming weeks will be the handing over of the company’s equity to first-lien lenders. Holders of second-lien debt, as well as current equity holders and unsecured creditors, will receive no recovery, according to a bankruptcy disclosure filing.
In a declaration statement, My Alarm Center CEO Amy Kothari specified numerous factors that adversely effected the company’s revenues, including the COVID-19 pandemic, leaving it no recourse but to file for bankruptcy. You can read more about the factors she cites in my initial report here. But up ahead, noted alarm industry attorney Ken Kirschenbaum provides some clarity on why some creditors are protected under the plan and why others aren’t.
In her declaration filing, Kothari cites first-lien debt totaling $197.5 million that is administered by Seaport Loan Products and Acquiom Agency Services. A prepackaged plan calls for these first-lien lenders to provide a $45 million debtor-in-possession loan, including at least $15 million in new financing to continue uninterrupted operations during the restructuring.
Unsecured vendors (trade debt) will be paid on claims for debt incurred within 90 days of the bankruptcy filing. Tax debt will be paid in the future by the emerging companies. All other creditors will receive nothing.
“The obvious question is how can [My Alarm Center holding company, Secure Home Holdings LLC] do this, and the answer is simple: They obtained the consent of the secured creditors before it filed the case,” Kirschenbaum says.
It also negotiated a deal with its secured lenders whereby 70% of those lenders agreed to convert approximately $240 million of debt into $145 million of equity shares in the emerging debtors.
“This was essential because in order to obtain bankruptcy court approval of a Plan of Reorganization, a debtor must obtain approval by majority votes of an impaired class of creditors,” says Kirschenbaum, who pens SSI’s Legal Briefing column.
The company’s largest unsecured creditors include various interests of investment management company Invesco Ltd., which is owed more than $39 million, and Goldman Sachs Specialty Lending Group, which is owed nearly $34 million.
By not paying the secured creditors in-full in cash for the claims, and by giving them a reduced equity share instead, those secured creditors are an impaired class and they have already agreed to being affected in this manner, Kirschenbaum explains. As a result, My Alarm Center was able to exclude payment for all other impaired classes since it no longer needs the vote of those creditors.
By way of example, My Alarm Center is proposing to convert $107 million of default interest into unsecured claims, which will receive a zero distribution. Similarly, any other unsecured creditor is also going to receive a zero distribution. Inter-company loans will also receive nothing.
As a result, should the plan be confirmed My Alarm Center will have shed hundreds of millions of dollars of secured and unsecured debt, and the former secured creditors will now hold what can only be presumed to be the majority equity ownership of the emerging debtors.
This will permit My Alarm Center to continue in operation in a vibrant way, Kirschenbaum says.
“Alarm companies who borrow money need to be very careful about the lending terms. Making the payments is often not enough,” he says. “When operating terms are violated a default occurs. That triggers increased interest on the debt, could change payment schedules and could require additional onerous operating requirements — making it all but impossible to continue in business.”
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