Interface completes $230m refi, gets new $45m revolver

Imperial Capital advises, predicts more high-yield bond deals
Wednesday, January 23, 2013

ST. LOUIS—Interface Security Systems, based here, last week completed a $230 million bond deal and also secured a new $45 million revolver from Capital One. Imperial Capital was the “sole bookrunner” for the bond deal and advised Interface on the revolving line of credit.

The new capital “enabled Interface to pay off all of its existing debt [and will fund future growth],” John Mack, managing director of Imperial Capital, told Security Systems News.

The $230 million is in the form of a high-yield bond, which will mature in six years and yield 9.25 percent interest. The bond, originally set for $225 million, was upsized to $230 million because of investor interest.

This deal shows the bond market’s growing interest and understanding of the security industry, Mack said.

Of course, not all security companies have the size to access the bond market. Mack said companies need “at least $3 [million] to $4 million in RMR to access the low end of the bond market.” Other prominent security companies that recently completed transactions that have tapped into the bond market, or non-banking, institutional investors, include Vivint, Monitronics, Protection 1 and Securitas Direct, Mack said.

Among the benefits of a high-yield bond transaction is the lack of covenants.

Bill Polk of Capital One called the bond deal “very innovative financing” and echoed Mack in saying that it may help rally more bond market interest in the security space.

“The fact that the bond market investors were so supportive of this deal suggests that other companies the size of Interface may have the opportunity to access this end of the market; [that market] has not played at this level before,” Polk said. However, “it will take quality companies like Interface [to secure this kind of deal].”

Interface has had impressive growth over the years. In 2007, it adopted a bundled-services approach to security, offering physical security with managed network solutions.

“In 2008, we began the year with $3.5 million in RMR,” Michael Shaw, Interface founder and CEO, told SSN. “At the end of 2011, we had $5.8 million in RMR … and we finished 2012 with approximately $7.9 million. If you look at the CAGR, that’s 23 percent growth [year over year].”

Interface does a large national accounts business in the QSR, convenience store, high-end retail, jewelry and hospitality verticals. Among its marquee clients are the Dollar General chain, which had 9,600 stores nationwide in 2010 and continues to add dozens monthly, Shaw said. 

Last March, Interface acquired Westec Interactive in a deal that brought important interactive video capabilities to Interface’s bundle. It also brought a management team headed by Kelby Hagar and “a highly specialized command center [in Plano, Texas],” Shaw said.

National account teams of the former Westec and Interface are now trained to sell all systems. It’s an area where the company has “gained tremendous momentum with the cross-selling of Westec to Interface building services customers [and vice versa],” Shaw said.

Together, those teams have identified and are pursuing a “$3 million pipeline of RMR opportunities” as the result of cross-selling, Shaw said.

Interface is a portfolio company of SunTx Capital Partners, a Dallas-based private equity firm.

Shaw has been in the security business for 40 years and said this refi deal was eye-opening for him.

“I’ve always relied on traditional lenders and banking groups,” Shaw said, but because the company’s debt-financing needs had reached a certain scale, Mack encouraged him to take a look at the bond market.

After a road show that included meeting with hundreds of investors in the bond market, Shaw concluded that the security industry “is definitely on their radar.”

“Almost every one I sat down with understands [and likes] the fundamentals of our industry,” Shaw said. “It’s a good sign.”