KKR’s BMC Deal Said to Add Leverage After Prior Fed Caution
(Bloomberg) -- KKR & Co.’s $8.3 billion purchase of BMC Software Inc. will increase leverage at the firm just two years after an earlier financing for the company drew a warning from regulators over risks in the debt.
KKR is buying BMC from a group led by Bain Capital and Golden Gate Capital in a transaction arranged by banks including Credit Suisse Group AG, Goldman Sachs Group Inc. and Jefferies Group LLC, that will push leverage to about 7.5 times a measure of earnings, according to people with knowledge of the deal.
The higher indebtedness surpasses a level of six times Ebitda, or earnings before interest, taxes, depreciation and amortization, that regulators in recent years have clamped down on as part of its guidance to rein in riskier lending. BMC and its lenders attracted scrutiny from the Federal Reserve in 2016, when it was designated a “non-pass” credit, said the people, who asked not to be identified discussing private details. That related to debt stemming from its original buyout by the Bain-led group in 2013.
Representatives for BMC and KKR declined to comment, as did representatives for Credit Suisse, Goldman Sachs and Jefferies. A spokesman at the Fed also declined to comment.
KKR’s latest debt proposal, still in an early stage of investor discussions, includes $1.825 billion of bonds, a $4.375 billion term loan and about $300 million of preferred equity, according to another person with knowledge of the plan. The New York-based firm is also putting up $2 billion of new equity as part of the deal.
The transaction tests limits for leveraged lenders under the Trump administration and whether they can depart from earlier guidelines. Two financial industry overseers have said this year that the guidance isn’t a hard-and-fast rule and banks need not adhere it, provided they maintained safe lending practices overall.
This apparent dialing back, together with heightened demand from investors for higher-yielding debt that tracks floating rates, has helped leverage tick upward on recent deals. Banks say the leveraged-lending guidance still informs their behavior and they continue to adhere to it. Another KKR buyout deal, for Envision Healthcare Corp., will also have leverage of about 7.5 times, people familiar with that deal said.
KKR is confident adding debt under the proposal won’t run afoul of lending criteria because BMC’s Ebitda has increased since its non-pass designation, the people familiar said. And because the plan also includes a portion of preferred securities less likely to be counted as leverage, the resulting level is closer to seven times, one of the people said.
Houston-based BMC should also be able to fulfill another requirement in the leveraged-lending guidance that the borrower be able to repay 50 percent of the total debt over a period of five to seven years, that person said.
The Fed graded BMC’s credit a “non-pass” in 2016 after a review known as the Shared National Credit program, which the regulator, together with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, carry out to assess bank lending practices. The SNC program, and the separate leveraged-lending guidance, only apply to federally supervised institutions.
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