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Rating Action:

Moody's Downgrades BMC notes to Caa2; affirms B3 CFR

Global Credit Research - 28 Nov 2017

Approximately $6.3 billion of rated debt affected

New York, November 28, 2017 -- Moody's Investors Service, ("Moody's") affirmed BMC Software Finance, Inc.'s B3 Corporate Family Rating but downgraded its and its affiliates existing unsecured notes to Caa2 from Caa1. Moody's also affirmed secured debt ratings as outlined below. The company is raising new secured and unsecured debt to refinance its parent company's PIK Toggle Notes (approximately $604 million outstanding) The downgrade in the unsecured ratings reflects the larger proportion of operating company unsecured debt in the capital structure. The parent company debt previously absorbed a significant proportion of losses in a default scenario. The ratings outlook remains stable.

RATINGS RATIONALE

BMC's B3 corporate family rating is driven by very high leverage (over 8x as of September 30, 2017) as a result of the 2013 private equity led buyout and subsequent dividend as well as the very limited proportion of equity in the capital structure. The ratings also consider the strength of BMC's market position as a leading independent provider of IT systems management software solutions, the resiliency of its high-margin mainframe software business and resultant cash generating capabilities. BMC's mainframe business is estimated to generate approximately half of the company's operating profit and cash flow, however, it is a flat to modestly declining business. BMC's free cash flow is generally positive but it can swing based on renewal cycles resulting in between 0% and 5% free cash flow to debt levels.

The ratings also reflect the challenges of navigating an evolving IT management market and continually restructuring the business. The IT management software industry is evolving to adapt to the growing complexity of cloud based, privately hosted, and on-premise IT environments and the established players such as BMC, CA Inc., IBM and HP Enterprise face increased competition from growing SaaS only players. Given the evolving nature of the industry, there remains significant risk that leverage and free cash flow could weaken.

The stable ratings outlook reflects our expectation that despite the very high debt load and competitive challenges, free cash flow levels will remain solid over the next 24 months and the company will have sufficient liquidity to fund all its operating needs and debt obligations. Ratings could be upgraded if the company demonstrates modest growth, leverage declines to less than 7x and free cash flow to debt averages greater than 5% through the renewal cycle. The ratings could be downgraded if leverage is expected to be sustained above 8x or free cash flow to debt is negative on other than a temporary basis.

Liquidity is expected to be good based on healthy levels of cash on hand ($579 million as of September 30, 2017), $310 million of revolver capacity and an expectation of solid free cash flow over the next 24 months.

Downgrades:

..Issuer: BMC Software Finance, Inc

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 (LGD5) from Caa1 (LGD5)

..Issuer: BMC Software Inc.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 (LGD5) from Caa1 (LGD5)

Outlook Actions:

..Issuer: BMC Software Finance, Inc

....Outlook, Remains Stable

Affirmations:

..Issuer: BMC Software Finance, Inc

.... Probability of Default Rating, Affirmed B3-PD

.... Corporate Family Rating, Affirmed B3

....Senior Secured Bank Credit Facility, Affirmed B1 (LGD3 from LGD2)

..Issuer: ESM Foreign Holdco, Inc.

....Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD2)

BMC Software Finance, Inc. is the entity set up by a group of private equity firms led by Bain Capital and Golden Gate Capital to acquire BMC Software, Inc. BMC is a provider of a broad range of IT management software tools and had revenues of $1.8 billion for the twelve months ended September 30, 2017. The company is headquartered in Houston, TX.

The principal methodology used in these ratings was Software Industry published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Matthew B. Jones
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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