Clarification from an earlier post regarding Epicor
Such statement was as follows: “Sometimes I think that I read too many 10-Q’s and other public documents. Many like the series from Epicor where they have said they probably won’t be in business because of their debt, or a few where they say that they need to float a bond issue to pay their Private Equity Investors a bonus. That also happened with Epicor.”
Epicor is indeed correct that the 10Q to which I was referring does not expressly say that the company stated it would not be in business because of their debt, rather, I should have stated that it is my opinion, based largely on reading Epicor’s 10Q and other public filings, as well as discerning information and comments from others, that the future for Epicor is certainly muddied by their substantial debt position. Here is an excerpt from Epicor’s public filing dated June 30, 2012.
“We have substantial indebtedness, which increases our vulnerability to general adverse economic and industry conditions and may limit our ability to pursue strategic alternatives and react to changes in our business and industry.
At June 30, 2012, the maturities of our outstanding debt consisted of $861.3 million (before $7.8 million un-amortized original issue discount as of June 30, 2012) of Senior Secured Credit Facility due 2018 and $465.0 million of senior notes due 2019. Our debt service related to the Senior Secured Credit Facility and senior notes for the nine months ended June 30, 2012 was $78.8 million, including $6.5 million of debt repayment related to the term loan, $67.8 million of interest expense, $8.4 million reduction in accrued interest, offset by $3.9 million amortization of deferred financing costs and amortization of OID.
This amount of indebtedness may limit our flexibility as a result of our debt service requirements, may limit our access to additional capital and to make capital expenditures and other investments in our business, may increase our vulnerability to general adverse economic and industry conditions, may limit our ability to pursue strategic alternatives, including merger or acquisition transactions, to withstand economic downturns and interest rate increases, to plan for or react to changes in our business and our industry to comply with financial and other restrictive covenants in our indebtedness or pay dividends.
Additionally, our ability to comply with the financial and other covenants contained in our debt instruments may be affected by changes in economic or business conditions or other events beyond our control. If we do not comply with these covenants and restrictions, we may be required to take actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of our existing debt, or seeking additional equity capital.
We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations, including the notes, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes. If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes.
If we are required to restructure or refinance our debt or we believe that it is in our best interest to restructure or refinance our debt, our ability to do so will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations, or such refinancing may not be available on terms acceptable to us or at all. Further, the terms of existing or future debt instruments and the indenture that will govern the notes may restrict us from some of these alternatives.
In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of cash flows and financial resources from additional indebtedness, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Moreover, our Senior Secured Credit Facilities and the indenture that governs the notes restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions on terms acceptable to us or the proceeds that we could realize from them may not be adequate to meet any debt service obligations then due. Any failure to meet our current or future debt service obligations would have a material adverse effect on our business.
Covenants in the indenture governing the notes, our other debt agreements and debt agreements we may enter into in the future will restrict our business in many ways.
The indenture governing the notes contains various covenants that limit, subject to certain exceptions, our ability and/or our restricted subsidiaries’ ability to, among other things.
- incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons:
- issue redeemable stock and preferred stock;
- pay dividends or distributions or redeem or repurchase capital stock;
- prepay, redeem or repurchase subordinated debt;
- make loans, investments and capital expenditures;
- enter into agreements that restrict distributions from our subsidiaries;
- enter into certain transactions with affiliates; and
- consolidate or merge with or into, or sell substantially all the assets of us and our subsidiaries, taken as a whole, to, another person.
A breach of any of these covenants could result in a default under the indenture governing the notes. Further, additional indebtedness that we incur in the future may subject us to further covenants. Our failure to comply with these covenants could result in a default under the agreements governing the relevant indebtedness. If a default under the indenture or any such debt agreement is not cured or waived, the default could result in the acceleration of debt under our debt agreements that contain cross-acceleration or cross-default provisions, which could require us to repurchase or repay debt prior to the date it is otherwise due and that could adversely affect our financial condition.
Our ability to comply with covenants contained in the indenture and any other debt agreements to which we are or may become a party may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Even if we are able to comply with all of the applicable covenants, the restrictions on our ability to manage our business in our sole discretion could adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that we believe would be beneficial to us.”(Highlighting added–end of excerpt.)
“Epicor returns to the high-yield market today with a drive-by offering of senior PIK toggle notes totaling $350 million to fund a dividend. There is an investor call this morning at 11:00 a.m. EDT, and pricing will follow this afternoon from joint book runners Bank of America, Credit Suisse, and RBC, according to sources.
The contingent cash-pay notes will have a five-year maturity with a 1.5-year non-callable period. Notes will be callable at 102% of par for six months and then steps to par plus 50% of the coupon, declining thereafter, sources note.
Standard and Poors this morning assigned an issue rating of CCC+ to the notes with a recovery rating of 6, to indicate expectations for negligible (0-10%) recovery of principal in the event of a payment default. S&P also revised its outlook on Epicor to negative, from stable, to reflect higher leverage. Moody’s has yet to weigh in but accounts are being told to expect Caa2, according to sources. Issuance comes under Rule 144A for life via Eagle Midco.
Apax Partners in May 2011 acquired and merged Activant Solutions and Epicor, the surviving company operating as Epicor Software. Financing for the transaction included a $465 million issue of 8.625% notes due 2019, an $870 million covenant-lite term loan, and $647 million of equity from Apax. Epicor in March completed a term loan repricing. The loan is now priced at L+325, with a 1.25% LIBOR floor, with six months of 101 soft-call protection. That is reduced from L+375, with a 1.25% floor.
Thus far in 2013, there have been ten regular-way PIK-toggle notes offerings for a combined volume of $2.4 billion. PIK toggle issuance of $6.25 billion in 2012 was the most since 2008. Roughly $4.95 billion of last year’s total, or 79%, was used to fund dividends, the most ever.” – Jon Hemingway (End of link reference).
I attributed the high yield bond offering as a “bonus” for the private equity investors, when the site states that its purpose was to “fund a dividend.”
My use of “bonus” was an opinion based on the context of the press release.
For the record, no one writing content for ElectricalTrends is attempting to devalue Epicor’s publicly traded debt for any financial gain. We have never traded, nor do we intend to trade, in any financial security related to Epicor’s publicly traded debt.
We at ElectricalTrends take our tasks and our responsibility to our readers seriously. As many of you know, we are here to express our opinions and insights in a forum for those interested in such topics. We have never acted maliciously or recklessly toward anyone or any business for whom we have expressed or presented content. Epicor disagrees with us and has asked us to retract our February 12 comments, and by this writing we hereby retract such comments. Please see the letter from Epicor’s lawyer requesting such retraction.
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