July 16, 2020 / 4:52 PM / 22 days ago

KKR-backed Epicor revives dividend deals ahead of a potential sale

NEW YORK (LPC) - Epicor Software Corp has awakened a sleepy dividend recapitalization market, unveiling the first such deal in almost five months as its private equity owner KKR prepares to cash out from the investment, two sources familiar with the proceedings said.

The enterprise software maker is launching a US$2.75bn, two-part transaction into the syndicated loan market on Thursday to support a so-called portable dividend recapitalization, the sources said. Epicor’s deal will be the first shareholder dividend transaction in the US leveraged loan market since American Express Global Business Travel (Amex GBT) launched a US$1.13bn loan in February, according to Refinitiv LPC data.

The loan backing Amex GBT’s purchase ultimately did not fund as buyers the Carlyle Group and Singaporean sovereign wealth fund GIC Pte Ltd walked away from the decision to acquire a 20% stake.

A portable deal for Epicor allows KKR to pay itself a dividend and transfer payment obligations of the new loan and the rest of the company’s debt to a new sponsor, should KKR sell its portfolio company.

As credit conditions have improved since March, sources are confident that timing is right for the leveraged loan market to complete its first dividend deal since the coronavirus gripped the financial markets, and for KKR to pocket some extra cash before evaluating a possible sale price for the company.

“There is not a ton of supply. It’s mainly refinancings, pushing out maturities and now, maybe, it’s time for dividend deals,” according to an investor. “The market will have an appetite for dividend recaps if it’s a good business and has some OID (original issue discount) on it.”

Epicor’s transaction comprises a US$1.925bn first-lien term loan and a US$825m second-lien loan. The company has approximately US$1.7bn outstanding on an existing first-lien loan that pays 325bp over Libor and matures in June 2022, according to Refinitiv LPC data.

KKR Capital Markets, Barclays, Nomura, Jefferies and Macquarie are arranging the US$2.75bn transaction, the sources said.

Spokespersons for Epicor, KKR, Jefferies, Nomura and Macquarie all declined to comment. A Spokesperson for Barclays was not immediately available for comment.

SECOND TIME AROUND

Austin, Texas-headquartered Epicor generates revenue through the sale of business-related software in the retail, distribution and manufacturing sectors.

Moody’s Investors Service, which rates the company B3, acknowledged Epicor’s high rate of recurring revenue as a cushion during uncertain economic times, the ratings agency said in a report on Tuesday.

KKR did explore Epicor’s sale that valued the company at roughly US$5bn, including debt, Reuters reported in August last year.

With this portable dividend, however, a second attempt to sell Epicor would come attached with greater leverage.

Debt to earnings before interest, tax, depreciation and amortization will increase to more than 8.0 times due to the new first- and second-lien loans, the ratings agency said.

Epicor should, however, improve leverage to less than 8.0 times over the next 18 months in the absence of acquisitions or more shareholder distributions. And under the terms of the new first- and second-lien loans, the credit agreement does include provisions for incremental debt. Epicor must also use any future asset sales proceeds to reduce debt, Moody’s said in its report.

Despite the aggressive debt levels, Moody’s praised Epicor’s history of reducing leverage since being acquired by KKR from fellow private equity firm Apax Partners in 2016. The company also benefits from good cash flow and has shown “relative resiliency during economic downturns.”

The company’s new debt facilities are “portable” to a potential new owner, but are subject to specific leverage-based tests, Moody’s said.

Reporting by Aaron Weinman. Editing by Michelle Sierra and Kristen Haunss.

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