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Rating Action:

Moody's downgrades BMC to B3; rates new parent notes Caa2

Global Credit Research - 08 Apr 2014

Approximately $6.7 billion in debt affected

New York, April 08, 2014 -- Moody's Investors Service downgraded BMC Software Finance Inc.'s corporate family rating to B3 from B2 and probability of default rating to B3-PD from B2-PD. Moody's affirmed ratings on existing debt facilities as outlined below. Moody's also assigned a Caa2 rating to parent, Boxer Parent Company Inc.'s proposed PIK Toggle Notes. The new notes will be used to finance an equity distribution to private equity owners led by Bain Capital and Golden Gate Capital. The ratings outlook is stable.

RATINGS RATIONALE

The downgrade of the corporate family rating to B3 is driven by the distribution to owners and increase in debt shortly after closing the LBO while a restructuring is still underway. As a result of the distribution, the effective amount of equity is reduced to approximately 7% of total capitalization (depending on the final size of the proposed notes and distribution) from an already low 17% at close of the buyout in September 2013. Debt to EBITDA increases to approximately 7x pro forma for certain cost actions already underway based on December 31, 2013 results (and well above 7x including those costs). The ratings also reflect 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 segment, though a slow growth business, is very stable and is estimated to generate two-thirds or greater of the company's operating profit and cash flow. Free cash flow to debt levels are expected to be below 5% however which is characteristic of B3 rated software companies.

The company is in the midst of a restructuring that is expected to significantly lower the cost base of the business. Although bookings are up year over year, since closing of the buyout, some of the increase in bookings is due to a lengthening of contract terms. As a result average annualized booking levels are down. Revenues and EBITDA are down year over year as well.

Liquidity is expected to be good based on $388 million of cash on hand as of December 31, 2013 (and estimated at $650-660 million at March 31, 2014) as well as an undrawn $350 million revolver. The company's SGL rating will be withdrawn as the company no longer files public financials.

Ratings could be upgraded if free cash flow to debt levels exceed 5% on a sustained basis and free cash flow is expected to grow, particularly if the company demonstrates a commitment to reducing debt. The ratings could face downgrade if leverage exceeds 8x or free cash flow to debt is negative on other than a temporary basis.

The following ratings were affected:

Downgrades:

..Issuer: BMC Software Finance, Inc

.... Probability of Default Rating, Downgraded to B3-PD from B2-PD

.... Corporate Family Rating, Downgraded to B3 from B2

Assignments:

..Issuer: Boxer Parent Company, Inc.

....PIK Toggle Senior Unsecured Notes, Assigned Caa2, LGD6, 94 %

Affirmations:

..Issuer: BMC Software Finance, Inc

.... Senior Secured Revolving Bank Credit Facility Sep 10, 2018, Affirmed B1, LGD2, 28 % from a range of LGD3, 33 %

.... Senior Secured Term Bank Credit Facility Sep 10, 2020, Affirmed B1, LGD2, 28 % from a range of LGD3, 33 %

.... 8.125% Senior Unsecured Regular Bond/Debenture Jul 15, 2021, Affirmed Caa1, LGD5, 78 % from a range of LGD5, 88 %

..Issuer: BMC Software Inc.

7.25% Senior Unsecured Regular Bond/Debenture Jun 1, 2018, Affirmed Caa1, LGD5, 78 % from a range of LGD5, 88 %

4.5% Senior Unsecured Regular Bond/Debenture Dec 1, 2022, Affirmed Caa1, LGD5, 78 % from a range of LGD5, 88 %

4.25% Senior Unsecured Regular Bond/Debenture Feb 15, 2022, Affirmed Caa1, LGD5, 78 % from a range of LGD5, 88 %

..Issuer: ESM Foreign Holdco, Inc.

.... Senior Secured Term Bank Credit Facility Sep 10, 2020, Affirmed Ba3, LGD2, 24 % from a range of LGD3, 32 %

....Euro denominated Senior Secured Term Bank Credit Facility Sep 10, 2020, Affirmed Ba3, LGD2, 24 % from a range of LGD3, 32 %

....Outlook, Stable

The principal methodology used in this rating was Global Software Industry published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

BMC is a provider of a broad range IT management software tools and had revenues of $2.1 billion for the twelve months ended December 31, 2013. The company is headquartered in Houston, TX.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert P Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades BMC to B3; rates new parent notes Caa2
No Related Data.
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