S&P: APX Group Inc.'s Proposed $100 Million Senior Secured Notes Assigned 'B' Issue Rating (Recovery Rating: 4)
Our 'B' corporate credit rating on APX Group Inc.'s parent, APX Group Holdings Inc. (also known as Vivint), reflects our expectation for high leverage of over 8x and modest de-leveraging prospects through 2017. Pro forma for the notes offering, Vivint's debt will amount to $2.5 billion. Our assessment also reflects our expectation for continuing negative free cash flow in 2016 and 2017 as the company continues to invest heavily to expand its subscriber base.
The stable outlook reflects our expectation that Vivint will continue to service its growing debt and maintain adequate liquidity supported by continuing subscriber growth and improving attrition rates, despite high leverage, significant expenditures to grow its subscriber base, and weak to negative free cash flow. Ultimately, we expect that Vivint will transition to a lower growth mode of operations where the company will generate greater free cash flow. We could lower the rating if an increase in attrition, higher subscriber acquisition costs, or continued significant investment in new subscribers causes liquidity to be less than adequate. Our business risk profile assessment of weak reflects Vivint's mid-tier position in the U. S. alarm monitoring industry, well behind market leader Prime Security Services Borrower LLC (the recently combined ADT Corp. and Protection 1). The electronic alarm monitoring market remains largely unpenetrated in the U. S., though competition is intensifying because technological advancements are lowering barriers to entry, with reduced differentiation among industry participant solutions.
In the six months ended June 30, 2016, Vivint reported revenues of $355 million, up of 14.5% compared to the six months ended June 30, 2015, due to a 13.6% increase in subscribers and a 2.4% increase in average revenue per user to $56.20. EBITDA grew about 10% to $96 million. EBITDA margin declined slightly as the company invested in field support to improve customer satisfaction and in general, sales, and administrative, particularly IT, to support its growing subscriber base. Recurring monthly revenue (RMR) grew 16% while attrition increased sequentially to 12.9% at June 30, 2016 from 12.6% at March 31, 2016 and above our estimate for overall industry attrition. Nevertheless, considering more recent evidence of improving client attrition, we expect the company's RMR to continue to grow in the low - to mid-teens in the second half of the year and its attrition to moderate back to the low 12% area, in line with industry attrition.
For the complete corporate credit rating rationale, please see our research update on APX Group Holdings Inc. published May 17, 2016, on RatingsDirect.