North America Leveraged Loan: Epicor Software’s US$2.75bn two-part term loan

IFR Awards 2020
3 min read
Aaron Weinman

Opening the floodgates

When KKR sought to cash in on its investment in software company Epicor, the private equity firm needed its capital markets team to dust the cobwebs off a combination of features that the leveraged loan market had not seen for months.

KKR eyed a nearly US$560m dividend payment from the transaction and wanted the loans to be portable ahead of the US$4.7bn sale of the company to fellow private equity shop Clayton, Dubilier & Rice.

The transaction, which also refinanced Epicor’s existing debt, was the first dividend recapitalisation the US leveraged loan market had seen in roughly five months and it was the first portable dividend deal in more than a year.

Epicor’s effort also opened the floodgates for other private equity-backed companies to launch dividend deals as credit markets rallied on the back of the US Federal Reserve’s bond buying programme.

“At that time, no one dared venture into the highly leveraged space. We thought there was a window to be the first to hit the market in a way that would work for investors and the issuer,” said Joshua Lederman, a director in KKR’s US debt capital markets team.

Not only did Epicor’s transaction prove a bellwether for other sponsor-backed companies, it also highlighted demand for Single B rated credit at a time when investors were still concerned about leveraged issuers falling into Triple C territory.

“We had a litany of calls along the lines of ‘how did you get this done?’,” said Lederman. “The market was surprised. We combined a B3 name, a dividend and portability into one deal.”

The US$1.925bn first-lien loan priced at 425bp over Libor and a 98 OID. The second-lien debt was split into a US$425m syndicated loan and a US$400m floating-rate note. The syndicated loan priced at 775bp over Libor and a 98.5 OID.

The syndicated second-lien tranche was allocated among more than 40 investors. At the time, Epicor’s second-lien loan was the largest to be syndicated in 2020. In the early stages of the year, issuers preferred to privately place their second-lien loans to a single lender or a small club.

But the decision to syndicate the riskier tranche of debt underscored investor confidence in the company and the credit markets. Following Epicor’s effort, companies raised a further US$3.8bn in the syndicated second-lien market in the third quarter, while US$1.6bn was privately placed. This is a remarkable uptick after just US$1.16bn was syndicated in the second quarter.

“It was a ‘shock and awe’ moment for the marketplace,” said Lederman. “Even during Covid-19, we proved the deal was possible and it cracked open second-lien loans in the syndicated market.”

KKR was lead-left arranger on the first-lien and sole lead arranger on the second-lien.

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