S&P: Epicor Software Corp. Downgraded To 'B-' On Acquisition-Related Debt Plans; Various Debt Ratings Assigned
At the same time, we lowered our issue-level rating to 'B-' from 'B' on the company's senior secured first-lien debt. The recovery rating on the company's senior secured first-lien debt remains '3', indicating our expectation for meaningful recovery (50% to 70%; lower half of the range) for lenders in the event of payment default.
We also lowered our issue-level rating to 'CCC' from 'CCC+' on the company's senior secured second-lien debt. The recovery rating remains '6', indicating our expectation for negligible recovery (0% to 10%) for lenders in the event of payment default.
The proceeds from the add-on debt issuance will be used to partially fund KKR's purchase of the company.
"The rating action is based on the company's increased pro forma leverage to about 8x from the low 7x area as of March 31, 2016, and our expectation that it will remain above 7.5x over the next 12 months," said S&P Global Ratings credit analyst Tuan Duong.
We view the higher leverage as an indication of management's high risk tolerance and continued aggressive financial polices under its new private equity owner. In conjunction with the sale to KKR, the company will issue an additional $300 million of debt, while the existing $100 million revolving facility expiring 2020, $1.4 billion ($1.39 billion outstanding as of March 31, 2016) senior secured first-lien credit facility due 2022, and $610 million senior secured second-lien term loan due 2023 remain in place.
Our rating on Epicor also reflects the company's competition with much larger and more diversified software providers, such as Oracle Corp., SAP SE, and Microsoft Corp., which have significantly greater financial resources. We believe the company's good market position in the middle-market ERP software industry, and high recurring maintenance and services revenue partially offset those factors.
The stable outlook reflects our expectation that the company will perform in line with our base-case scenario, such that the company experiences revenue growth in the low single digits and stable-to-slightly-improving EBITDA margins in the low to mid-30% area, leading to modest leverage improvement to the mid - to high 7x area over the next 12 months.