The market continues to puke out companies that were in trouble prior to COVID-19. Here we have Pennsylvania-based Secure Home Holdings LLC (and four affiliates, the “debtors”). The debtors are behind My Alarm Center, a national provider of, among other things, residential and commercial security systems, home automation systems, and smoke and carbon monoxide detectors.Revenues stem primarily from alarm monitoring contracts in addition to services and installations. In 2020, revenues from the former came to ~$88mm while the latter drummed up ~$7mm.

So? What gives? The debtors struggled with projected covenant defaults as far back as late 2019. Those “projected” defaults ultimately became “actual” defaults and the debtors hired Raymond James & Associates Inc. ($RJF) to pursue either a sale or refinancing transaction. But then … Covid.

We’ve obviously talked a lot about how the pandemic has affected businesses that require customers to come to them. Relatively speaking, we’ve paid short shrift to businesses that rely upon employees to visit and interact with customers. Mostly because we haven’t seen that many of them file even though it stands to reason that there’s probably a meaningful amount of distress there. Or, as we pointed out on Sunday, there would have been were it not for the CARES Act (indeed, the debtors obtained $6.8mm from the PPP program).

Here though:

Historically, a significant portion of the Debtors’ customer contracts resulted from door-to-door sales activity and in-home installations, but these activities came to an abrupt halt with the onset of the pandemic and mandatory state-wide stay-at-home orders. Although restrictions have partially eased in many locales, the Debtors’ door-to-door sales and in-home installations continue to be lower than pre-pandemic levels.

Makes sense. Given how people were Cloroxing their fruits and vegetables, it’s no shocker that customers weren’t all-too-amenable to home visits.

Which creates a vicious cycle. To get customers more comfortable, the debtors had to make investments and, to survive, alter the way it does business:

At the same time, the Debtors have faced increased costs directly related to COVID-19, including maintaining personal protective equipment for employees, additional cleaning required for offices and vehicles, transitioning their workforce to remote working, additional communications with customers, and additional overtime costs as employees were asked to cover for others who could not continue to work.

So while there were no easy operational answers, the balance sheet remained an issue. The pandemic scared off two potential purchasers of certain assets — something that might have provided much needed liquidity and stave off debt defaults. No dice:

…as a result of the current economic environment, disruption within the home security industry, and the decision by two of the Debtors’ major lenders to exit all home security loans, the Debtors defaulted under both of their credit agreements. These defaults left the Debtors unable to draw on their revolving credit facility. The Debtors also lack significant cash reserves.

Interestingly, the debtors don’t elaborate on what they mean by “disruption within the home security industry,” but, luckily, this is ground we’ve covered before; therefore, color us unsurprised that there’s skittishness amongst the lender set.

As for the defaults, they occurred in May 2020. That’s right, nearly 12 months ago. Thereafter, the debtors engaged restructuring pros (including a lender-mandated CRO) and have been negotiating with their lenders and pursuing strategic alternatives ever since. Per the debtors:

The forbearance agreements were amended and extended multiple times to permit these processes and negotiations to continue.

That’s the pandemic in a nutshell. The lenders exercised remedies and declared a default but then … well, then … they worked with the debtors for an extremely long time to get to this juncture. During this time, the debtors obtained a letter of intent that contemplated a sale transaction but that avenue closed once the buyer was unable to obtain financing. The debtors, then, had to pivot to an alternative.

The culmination of that pivot is the debtors’ proposed plan of reorganization and DIP financing. The plan contemplates doling out equity ownership to the first lien lenders led by funds affiliated with Invesco. Invesco and the other first lien lenders (which includes First Midwest Bank and CIT Bank NA), will also provide a $30mm DIP ($15mm new money). Interestingly, the plan delineates that the first lien lenders are undersecured; the plan allows a first lien claim of not less than $95mm (of the $197mm funded), leaving, after accounting for the DIP roll-up too, a pretty hefty unsecured deficiency claim (hence why funds affiliated with Invesco are scattered throughout the debtors’ list of top unsecured creditors filed along with the petition). This also explains why the second lien creditors — represented by agent, Goldman Sachs Speciality Lending Group LP — are an impaired class recovering bupkis (PETITION Note: well, bupkis other than a $1mm fee + $200k legal expense reimbursement in connection with consent to the priming DIP); they too are deficiency claims. Upon emergence, the implied plan enterprise value will be $145mm, as follows: