Fitch Downgrades ADT's IDR to 'BB'; Ratings on Watch Negative Following Acquisition Announcement

Fitch Ratings has downgraded the ratings of ADT Corporation (NYSE: ADT), including the company's Issuer Default Rating (IDR), to 'BB' from 'BBB-'. Fitch has also placed the ratings on Rating Watch Negative following ADT's announcement that it has entered into a definitive agreement to be acquired by an affiliate of certain funds (the Apollo Funds) managed by affiliates of Apollo Global Management, LLC (NYSE: APO).

ADT had about $5.4 billion of debt as of Dec. 31, 2015.

KEY RATING DRIVERS

The downgrade of the IDR to 'BB' reflects Fitch's expectation that the company's credit metrics will be meaningfully weaker following the completion of ADT's acquisition. Fitch expects leverage as measured by debt to EBITDA will likely settle between 5x-5.5x on a pro forma basis compared with 3.0x for ADT on a standalone basis for the latest-12-months ended Dec. 31, 2015.

Acquisition by Apollo Funds

On Feb. 16, 2016, the company reached a definitive agreement to be acquired by certain Apollo Funds for $42 per share. ADT is expected to be merged with Prime Security Services Borrower LLC (Protection 1), a leading full-service business and home security company in the U.S. also owned by the Apollo Funds.

The combined company will have total revenues of about $4.2 billion and $318 million of recurring monthly revenue. Based on management estimates, the combined company will have about 30% market share in the North American residential monitored security market. Protection 1's robust commercial presence will also further enhance ADT's capabilities in the commercial sector.

Increased Leverage

The acquisition of ADT by the Apollo Funds will be funded by $1.555 billion of new first lien term loans, $3.14 billion of new second lien loans, $750 million of preferred securities and $4.5 billion of equity contribution from funds managed by Apollo.

Protection 1 expects that its existing $1.095 billion first lien term loan and $260 million second lien term loan will remain outstanding.

Protection 1 intends to redeem all of ADT's outstanding $750 million 2.25% senior unsecured notes due 2017 and $500 million 4.125% senior unsecured notes due 2019 and repay all outstanding borrowings under ADT's revolving credit facility ($355 million as of Dec. 31, 2015). ADT's remaining $3.75 billion of senior unsecured notes will remain outstanding and will be guaranteed by Protection 1 and all wholly-owned domestic subsidiaries of the combined company and will be secured by first priority security interests in substantially all of the assets of the issuer and guarantors.

The combined company will have total debt of about $9.8 billion, including $6.4 billion of first lien debt and $3.4 billion of second lien loans. Fitch estimates that the combined company will have pro forma debt to EBITDA of about 5.0x. As of Dec. 31, 2015, ADT had debt to LTM EBITDA of about 3.0x.

Liquidity

Following the completion of the acquisition, ADT's revolver will be repaid and terminated. Protection 1 will enter into a new $255 million first lien revolving facility concurrently with the closing of the merger, bringing the total combined senior secured revolving facility to $350 million.

Fitch expects to resolve the Negative Watch prior to completion of the merger after it has an opportunity to review details about the merged company's operating strategy, capital structure, integration plans, and future FCF and leverage.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--Completion of the acquisition of ADT by affiliates of the Apollo Funds;

--ADT's $3.75 billion of senior unsecured notes are expected to remain outstanding and will be secured by first priority security interests in substantially all of the assets of the issuer and guarantors (including Protection 1 and its wholly-owned domestic subsidiaries). Fitch expects the remaining ADT notes will rank pari passu with the existing and new first-lien notes of the combined company;

--Debt to EBITDA settles between 5.0x - 5.5x on a pro forma basis.

RATING SENSITIVITIES

Further negative rating actions will be considered if debt to EBITDA is sustained above 5.0x for an extended period following the completion of the acquisition of ADT.

The 'BB+/RR2' rating on ADT's senior notes that are expected to remain outstanding after the acquisition may be downgraded if the collateral securing these obligations are not on par with the existing and new first-lien notes of the combined company.

Positive rating actions are unlikely in the near term.

FULL LIST OF RATING ACTIONS

Fitch has downgraded and placed the following ratings on Rating Watch Negative:

ADT Corporation

--Long-term IDR to 'BB' from 'BBB-';

--$3.75 billion of senior notes 'expected to remain outstanding' to 'BB+/RR2' from 'BBB-';

--Unsecured debt to 'BB/RR4' from 'BBB-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 07 Dec 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999576

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999576

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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