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TEXT-S&P affirms Epicor Software 'B' rating
November 8, 2012 / 10:57 PM / 5 years ago

TEXT-S&P affirms Epicor Software 'B' rating

Overview
     -- U.S. enterprise resource planning (ERP) solutions provider Epicor 
Software Corp. is issuing $340 million holdco senior discount notes due 2017 
to fund a distribution to sponsor.
     -- We are affirming our 'B' corporate credit rating on the company. The 
outlook is stable.
     -- The stable outlook reflects our expectations for continued good 
revenue visibility from highly recurring revenue and consistent positive free 
operating cash flow (FOCF), enabling a modest decline in leverage over the 
intermediate term.

Rating Action
On Nov. 8, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate 
credit rating on Epicor Software Corp. The outlook is stable.

We assigned our 'CCC+' issue-level rating and '6' recovery rating to the $340 
million holding company (holdco) senior discount notes due 2017 issued by the 
parent company of Epicor Software Corp., Eagle Midco Inc. Epicor will use the 
proceeds for a distribution to the sponsor. The '6' recovery rating indicates 
that lenders can expect a negligible (0% to 10%) recovery of principal in the 
event of a payment default.

At the same time, we are affirming the 'B+' issue-level rating on Epicor's 
senior secured credit facility. Its recovery rating remains at '2', indicating 
that lenders can expect a substantial (70% to 90%) recovery of principal in 
the event of a payment default. Additionally, we are affirming the 'CCC+' 
issue-level rating on the company's senior unsecured notes. Their recovery 
rating remains at '6' indicating that lenders can expect a negligible (0% to 
10%) recovery of principal in the event of a payment default.


Rationale
The rating on Epicor reflects Standard & Poor's view of the company's highly 
recurring revenue base from its ERP software maintenance and services, and 
consistently positive free operating cash flow (FOCF) generation. We view the 
company's business risk profile as "weak," primarily characterized by its 
competition with much larger and more diversified software firms. We view the 
company's financial risk profile as "highly leveraged." The company has an 
aggressive financial policy as demonstrated by its high leverage level of 
about 7x, pro forma for the discount notes issuance, up from about 6.1x on 
June 30, 2012, pro forma for the purchase accounting adjustment from the 
Activant merger in May 2011.

Epicor is a midtier ERP solutions provider that focuses on the manufacturing, 
retail, distribution, and services verticals; however, it is still subject to 
industry cyclicality, especially in the retail and housing-related end 
markets. The company announced the acquisition of Solarsoft Business Systems 
in September 2012, which we expect to strengthen Epicor's product offerings in 
midmarket ERP, specializing in the manufacturing and distribution verticals. 
We anticipate the company's organic revenue growth over the next year to be in 
the low-single-digit percentage area year over year, as organic growth from 
its ERP solutions to midsize businesses is partly offset by retail and 
housing-related end markets feeling the constraints of ongoing high 
unemployment and falling consumer confidence.

Epicor derives a significant amount of recurring revenue from maintenance and 
services and has renewal rates at over 90% (with more than 80% of revenues 
from its installed customer base). We expect these factors to continue to 
provide revenue visibility and consistent profitability and cash flows. We 
expect the company's margins to be relatively stable in the mid-20% area after 
the successful integration of Activant, and above the midteen level prior to 
the Activant merger in July 2011.

We view Epicor's financial risk profile as highly leveraged. Pro forma for the 
purchase accounting adjustment from the Activant merger and the discount notes 
issuance, operating lease-adjusted leverage would be about 7x, higher than the 
6.1x level on June 30, 2012, and about the same level as immediately after the 
close of the merger with Activant in July 2011. We expect the company's pace 
of leverage reduction to be slower now because of the issuance of the $340 
million holdco senior discount notes, with leverage to remain at or above the 
mid-6x level over the next two years, primarily as a result of interest 
accrual partly offsetting EBITDA growth.

Liquidity
Epicor's sources of cash provide "adequate" liquidity. Cash sources include 
cash and short-term investment balances of about $35 million at close of the 
dividend recapitalization transaction, and expected positive annual FOCF. 
Availability would be limited from the company's $75 million revolver because 
of the amount drawn for the acquisition of Solarsoft. We expect uses to 
include modest, growth-related working capital investments and annual capital 
expenditures of about 4% of total revenues.

Additional relevant factors of Epicor's liquidity, in our view, are as follows:
     -- We expect sources of cash to be above 1.2x over the next 12 to 24 
months.
     -- We also expect net sources to be positive in the next 12 months, even 
if EBITDA falls by 15% to 20%.
     -- We don't expect or incorporate any significant acquisitions in the 
rating.

Recovery analysis
The issue-level rating on the $340 million holding company (holdco) senior 
discount notes due 2017 issued by the parent company of Epicor Software Corp., 
Eagle Midco Inc., is 'CCC+'. The '6' recovery rating indicates that lenders 
can expect a negligible (0% to 10%) recovery of principal in the event of a 
payment default.

The issue-level rating on Epicor's senior secured credit facility is 'B+' and 
the recovery rating is '2'. This indicates that lenders can expect a 
substantial (70% to 90%) recovery of principal in the event of a payment 
default. In addition, the issue-level rating on the company's existing senior 
unsecured notes is 'CCC+' and the recovery rating is '6'. This indicates that 
lenders can expect a negligible (0% to 10%) recovery of principal in the event 
of a payment default.


Outlook
The outlook is stable, reflecting good revenue visibility from high recurring 
revenue and consistent positive FOCF. Although we consider an upgrade unlikely 
over the next two years, we could raise the ratings if organic revenue growth 
accelerates, improving EBITDA margin above the mid-20% area such that leverage 
falls to the low-5x area.

If revenue declines or profitability deteriorates because of intense 
competition or loss of leadership position in the midmarket ERP market, 
resulting in inability to modestly reduce leverage as we expect, we could 
consider a rating downgrade.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Ratings List
 

New Rating

Eagle Midco Inc.
 Senior Unsecured
  US$340 mil discount notes nts due 2017   CCC+               
   Recovery Rating                         6                  

Ratings Affirmed

Epicor Software Corp.
 Corporate Credit Rating                  B/Stable/--
 Senior Secured                           B+
     Recovery Rating                      2
 Senior Unsecured                         CCC+
     Recovery Rating                      6                  




Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

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