OREANDA-NEWS. S&P Global Ratings said today that it lowered its corporate credit rating on Dallas-based Monitronics International Inc. to 'B-' from 'B'. The rating outlook is stable.

At the same time, we assigned our 'B-' issue-level rating and '4' recovery rating to the company's proposed $700 million first-lien term loan due 2022 and $400 million senior secured notes due 2023. The '4' recovery rating indicates our expectation for average (30%-50%; upper half of the range) recovery of principal for lenders in the event of a payment default.

We also lowered our issue-level rating on the company's existing first-lien debt, including the $315 million revolver due 2017, the $404 million term loan due 2018, and the $550 million term loan due 2022 (all of which are being refinanced), to 'B-' from 'B'. We revised the recovery rating to '4' from '3'. The '4' recovery rating indicates our expectation for average (30%-50%; upper half of the range) recovery of principal for lenders in the event of a payment default.

Additionally, we lowered our issue-level rating on the $585 million senior unsecured notes due 2020 to 'CCC' from 'CCC+'. The recovery rating is unchanged at '6', indicating our expectation for negligible (0%-10%) recovery of principal for lenders in the event of a payment default.

"The downgrade reflects our view that Monitronics will continue to report negative free operating cash flow and rising leverage even as it experiences little growth in its subscriber base over the next 18 months," said S&P Global Ratings' credit analyst Kenneth Fleming. Recently, the company has been challenged by high subscriber attrition and historically high dealer multiples to purchase new subscribers. These factors have made it expensive to replace subscribers lost from attrition, since Monitronics sources most of its customers from its third-party dealer network.

"The stable outlook reflects our expectation that Monitronics will be able to service higher interest expense under the new capital structure," said Mr. Flemming. "Although we expect the company to generate negative free cash flow over the next 24 months, we project gradual improvement in attrition and creation costs, which will enable the company to reduce its cash usage."

We could lower our corporate credit rating on Monitronics if the company's account creation costs increase or attrition rises further, resulting in significant declines in its subscriber base, less-than-adequate liquidity, or if it sustains headroom on any covenants below 10%.

We could raise the rating if attrition and creation costs improve to allow free cash flow to debt increased above 3% on a sustained basis.