Recession sounded cautionary note in 2001

Capital providers more restrictive, selective with their lending practices
Friday, February 1, 2002

Caution, both on the part of capital providers and security alarm
dealers seeking new or increased financing, has been the watchword during these recent recessionary times.

Although characterizing the alarm industry as a "recession resilient" sector, capital providers with whom Security Sy-stems News spoke said they have ta-ken their cue from the conservative ten-or of the capital markets in general and are being more selective and restrictive in their lending practices.

"Terms are tighter," stated Henry Edmonds, chief executive officer of SLP Capital, based in St. Louis.

"We have to reflect what's going on in the capital markets," he said.
Advanced multiples based on recurring monthly revenues have settled in the 24 and 25 range from highs of 27 to more than 30 times RMR, according to many company spokespeople.

Dan Linscott, vice president at Dallas-based Financial Security Services Inc., said his company recently adopted a policy under which multiples won't exceed the mid-'20s.

FSS, he said, "for the past several years participated in high multiples to fund mass market programs." But in eval-uating the performance of these companies, Linscott said, "some have succeeded, but it's the minority."

The more fiscally conservative approach, he noted, won't attract mass market, zero-down companies.

Instead, he said, "what we are looking for are those companies getting dollars up front from their subscribers."

Companies with established businesses and recurring revenue streams are more likely customers for this lending policy.

The decision, he noted, isn't a new development, but instead a return to practices of previous years.

"As an organization, we're returning to where we were years ago," Linscott said, "before an incredible push came over the industry."
That push, he said, "required us to give everything away."

Greg Spurr, managing director for MCG Capital Corp. in Washington, agreed that for a number of years, prices were inflated for alarm companies.

"That made lenders think this would last forever," he said.
"Now we've gone back to more traditional valuation numbers."

Diane Rooney, senior vice president of Citizens Bank of Massachusetts, concurred that multiples have contracted over the past few years from a peak in 1998.

Part of what's driving the conservative trend on the banking side, she said, is a change in the regulatory environment. Leveraged lending or cash flow loans, Rooney said, have stricter requirements on underwriting and due diligence.

The result? "Both parties need more patience now," she stated.
The conservative approach by banks and capital providers who specialize in alarm dealer financing can be vexing for dealers, according to Paul Sargenti, president and chief executive officer of Security Alarm Financing Enterprises L.P., in San Ramon, Calif.

Dealers, Sargenti said, feel their business hasn't changed much, "yet they wonder why they are less acceptable (to lenders)." However, he noted, the dealers themselves played a role in reduced financing activity, referring to it as the "emotional component."

"Does he (the dealer) want to acquire debt, or does he want to sit on the sidelines to see how the economy shakes out," Sargenti asked. Dealers, he added, have been less willing to "aggressively commit" to taking on new debt. "They're making inquiries, but they're not committing," he said.

Lower interest rates have varying effects on the industry, according to capital providers.

SLP's Edmonds noted with interest rates at 40-year lows, "we are in an environment where things will be improving for alarm dealers." Right now, he said, lower rates "take the pressure off" for borrowers and "has helped with cash flow."

Rooney said for borrowers who are highly leveraged, reduced interest rates do provide more flexibility.

Still, MCG's Spurr said lower interest rates haven't translated into a willingness to lend. Selectivity, based on a dealer's ability to service its debt, remains in place.

Because of cautious practices and a recession resistant industry, defaults and problem loans have been at a minimum, according to the interviewees.

"Our customers are in good shape generally," Edmonds said, adding the tendency when times get tough is to "tighten their belts, cut costs and improve performance."

Even with these actions, Edmonds noted, "it's still a good time for dealers to be as efficient as possible."

Spurr said for those who do get into trouble, the options are downsizing and restructuring. "They can try to refinance, but it's difficult to do that in an environment like today."

A company's other option, he said, is to sell.

Those companies that are in trouble, Spurr said, "are ones that expanded too quickly and can't cover their debt."

Many lenders, he said, will work with troubled companies to help them restructure and get their expenses back in line. "Companies with experienced lenders aren't going to be forced to sell."