-- The owners of U.S. supply chain management (SCM) software provider RedPrairie Corp. are proposing the issuance of a $1.45 billion first lien term loan and a $650 million second lien term loan to acquire JDA Software Group Inc. The proposed $100 million revolving credit facility will be undrawn at close.
-- We are assigning a preliminary ‘B’ corporate credit rating to RP Crown Parent LLC, which will be the parent of the two currently rated entities. We will withdraw all ratings assigned to RedPrairie Corp. and JDA Software Group Inc. after the close of the transaction.
-- At the same time, we are assigning a preliminary ‘B+’ issue-level rating to the proposed first lien term loan with a preliminary recovery rating of ‘2’. We are also assigning a preliminary ‘CCC+’ issue-level rating to the proposed second lien term loan with a preliminary recovery rating of ‘6’.
-- The stable outlook reflects our expectation that the company’s recurring revenue base will allow it to deliver modest revenue growth despite a challenging selling environment, and that it will realize cost synergies in 2013, resulting in modest deleveraging to the mid-to-high 7x area.
On Nov. 27, 2012, Standard & Poor’s Ratings Services assigned a preliminary ‘B’ corporate credit rating to RP Crown Parent LLC. The outlook is stable. In addition, we assigned our preliminary ‘B+’ issue-level rating to the company’s proposed $1.45 billion senior secured first lien term loan due 2018, and $100 million revolving credit facility due 2017. The preliminary ‘2’ recovery rating indicates our expectation of substantial recovery (70% to 90%) in the event of payment default. We also assigned our preliminary ‘CCC+’ issue-level rating to the company’s senior secured second lien term loan due 2019. The preliminary ‘6’ recovery rating indicates our expectation of negligible recovery (0% to 10%) in the event of payment default.
The company will use the proceeds, along with cash and new equity, to acquire all outstanding shares of JDA common stock, to repay existing debt at RedPrairie and JDA, and to pay transaction costs. Rationale The preliminary ratings on RP Crown Parent LLC reflect the combined company’s “fair” business risk profile resulting from its narrow product focus, its competitive market segment, and near term integration risk, as well as its “highly leveraged” financial risk profile with pro forma leverage above 8x and modest free cash flow expected in 2013. Partially offsetting these factors are meaningful recurring revenues and its diverse and entrenched customer base, which we expect will allow the company to deliver modest revenue growth. We expect meaningful cost synergies in 2013 to result in leverage in the mid-to-high 7x area.
The merger will combine JDA’s strength in supply chain planning (demand forecasting and pricing) and RedPrairie’s supply chain execution capabilities (warehouse, workforce, transportation, and multi-channel management) to create the no. three competitor in the market for SCM software and position it as a best-of-breed, end-to-end solution with strength in retail and manufacturing. The company will be led by the current JDA CEO, who has a track record of successfully integrating large scale acquisitions such as Manugistics in 2006 and i2 in 2010. Competition in the SCM software market is intense with SAP and Oracle holding a meaningful share of the market, while the rest is highly fragmented.
We view the company’s business risk profile as fair, reflecting its narrow focus on the SCM software market; competitive industry dynamics with larger, more diverse competitors and several niche players; and exposure to the cyclical retail and manufacturing industries. In the near term, the company faces integration risk related to an aggressive cost-reduction plan representing nearly 10% of pro forma revenues and combining product platforms. Nevertheless, the company has meaningful recurring maintenance and subscription revenues, modest customer concentration with its top five customers representing less than 15% of revenues, and products that are critical to its customers’ operations, resulting in high customer retention. The company has also demonstrated the ability to monetize its existing customer base with the majority of its license revenue coming from existing customers.
Our assessment of the company’s management and governance is “fair”. Pro forma revenues for the 12 months ended Sept. 30, 2012 were more than $1 billion with EBITDA margins in the mid-20% area. We expect that in 2013, a challenging IT spending environment will result in low-single-digit revenue growth, but that the company will be able to deliver modest margin expansion through realized cost synergies. We anticipate that free cash flow will be modestly positive in 2013 as the company incurs restructuring costs. We view the company’s financial risk profile as highly leveraged with adjusted leverage in the low 8x area as of Sept. 30, 2012, pro forma for the transaction and excluding expected cost synergies. We expect leverage to peak in the mid-8x area at the end of 2012 as a strong fiscal 2011 fourth quarter rolls off.
Furthermore, we anticipate that in 2013, leverage will fall to the mid-to-high 7x area as the company realizes cost synergies with the potential to reach the low-7x area if the company captures all anticipated cost savings. Although JDA’s CEO has a track record of transformative acquisitions, there is no capacity within the preliminary ratings for additional debt-financed acquisitions.
The combined company’s liquidity is “adequate” in our view, with sources of cash likely to exceed uses during the next 12 to 24 months. Cash sources include an expected cash balance of $100 million following the transaction, $100 million of availability under its proposed revolving credit facilities, and expected annual funds from operation in the $110 million area (before restructuring costs).
We expect uses to include modest working capital investments and capital expenditures near $50 million, $15 million of mandatory debt amortization, and $50 million of restructuring costs over the next 12 months. Our assessment of the company’s liquidity profile incorporates the following expectations, assumptions, and factors:
-- Sources of liquidity are likely to exceed uses by at least 20% over the next 12 to 24 months.
-- Net sources would be positive, even with a 15% decline in EBITDA.
The proposed credit facilities will include only a springing leverage covenant that is in force when the revolver is 25% drawn, and that this covenant will be set such that the company can maintain at least 15% cushion. Recovery analysis For the complete the recovery analysis, see the recovery report on RP Crown Parent, to be published soon after this report, on RatingsDirect on the Global Credit Portal.
The stable outlook reflects our expectation that the combined company’s recurring revenue base will allow it to deliver modest revenue growth, and that realized cost synergies will result in leverage in the mid-to-high 7x area. The possibility of an upgrade is limited by the company’s highly leveraged financial profile and modest expected free cash flow in 2013. We could lower the rating if the company does not deleverage from pro forma levels in 2013 due to integration challenges, macroeconomic headwinds, or increased competition. We could also lower the rating if these factors lead to negative free cash flow or inadequate liquidity.