This regionally-focused, leading security alarm monitoring company provides electronic security services and ancillary products to a portfolio of highly-concentrated residential, governmental, and commercial subscribers. The private equity-backed company has been executing an aggressive growth strategy, combining solid organic growth efforts with a focused regional fold-in acquisition strategy.
The domestic security alarm monitoring and systems integration market is a $39 billion dollar industry with an expected growth rate varying from 5% to 12% annually. The space is largely defined by the level of sophistication of the end-user’s needs, with the highest amount of growth expected to be in sales of integrated security solutions to corporate and government customers (systems integration).
The security alarm market presents many unique financing challenges including GAAP accounting practices that result in unadjusted operating losses and, in many cases, negative net worth positions. These accounting challenges, combined with a voracious capital need when growing, require security alarm companies to partner with a capital provider that has a thorough understanding of the sector.
Spurred on by strong comparable sales in the security industry in the fall of 2007, the security company’s management team and their private equity sponsors decided to sell the company. The company’s potential for growth was attractive to interested parties, and growing the company was key to a return on their investment. They were not only looking for a financial services partner to provide debt for purchasing during a challenging credit market, but also one who could provide the requisite growth capital to continue to grow the company and justify the price sought.
With their extensive experience in the security sector, CapitalSource recognized the strength of the security provider’s growth strategy and business model and, despite the weak financial market, worked with the borrower’s investment banker to provide senior financing terms to each of the bidding private equity firms. Sensing the unique opportunity available with this security provider, one private equity firm quickly negotiated terms to acquire the company, and at their request, CapitalSource arranged a larger facility with favorable advance rates to allow the company to accelerate its growth.
To achieve the leverage and capacity requirements desired by the new sponsor, CapitalSource utilized their extensive relationships in the security monitoring industry to identify and recruit three additional lenders to round-out a $165 million financing package in a very challenging credit environment. The facility was structured with a large senior revolving credit loan with availability based upon the company’s portfolio of recurring service contracts and installation receivables. To allow the security provider to have the necessary “dry powder” for larger acquisitions, a last-out senior term loan was established that allowed them to periodically draw more expensive “just-in-time” capital for larger acquisitions.
|Senior Revolving Credit Loan
|Last-out Senior Term Loan
|Total Credit Facilities
As a true indication of the success of the new structure, the security company was able to utilize the new credit facilities to acquire a large regional competitor with significant geographic overlap, closing this transaction only 15 days after the initial transaction.
CASE STUDY WRITTEN: 11/08