BMC Software (BMC) is an IT management company based in Houston, Texas, that was that was acquired by private equity firms Bain Capital and Golden Gate Capital in September 2013 for around $6.9 billion. BMC Software’s main competitors are CA Technologies (CA), IBM (IBM) and other large technology companies. Many of its businesses, including in particular its mainframe business, are characterized by high switching costs, low customer turnover and high recurring revenues. It has been a stable business, and that’s why it was a great target for a leveraged buyout.
The LBO was financed by equity contributed by the sponsors and debt, including a $350 million revolving facility, $2.9 billion, $335 million and Euro 500 million term loans and $1.6 billion senior notes. The $1.6 billion senior notes mature in 2021, pay 8.125% interest and currently yield around 7.5%.
So how is a retail investor like you or me able to participate in this transaction? We can’t buy the bank loans and the $1.6 billion of senior notes were only sold to qualified institutional buyers. We obviously can no longer participate in the equity of the company. So where does that leave us?
The interesting thing about this LBO is that it also involved a tender offer for BMC’s outstanding SEC-registered notes. Although most of the outstanding notes were purchased in the tender offer, a small amount was not, and those notes are still outstanding.
4.25% Notes Due 2022 (Cusip 055921AB6)
4.50% Notes Due 2022 (Cusip 055921AC4)
BMC originally issued $500 million of the 4.25% notes and $300 million of the 4.50% notes in 2012. Around $454 million of the 4.25% notes and $270 of the 4.50% notes was repurchased during the tender offer in connection with the LBO, leaving around $46 million of outstanding 4.25% notes and $30 million of outstanding 4.50% notes. As a result of the additional leverage incurred in the LBO and the amendments made in connection with the tender offer/consent solicitation, these notes now yield around 10.5-11%. Here are two charts showing the yield and price history and the impact of the LBO on the 4.25% notes and 4.50% notes.
My view is that if BMC is able to refinance its $1.6 billion of senior notes due 2021 by their maturity date, then it will very likely be able to refinance the $46 million and $30 million of notes due in 2022. That amount is almost immaterial in the context of the overall debt incurred in the LBO. There may be a different recovery analysis between the bonds in an insolvency scenario, but it seems that the refinancing risk is more or less the same even though the 2022 notes mature after the 2021 notes. Consequently, although I encourage you to do a full covenant recovery analysis, the $1.6 billion notes due 2021 and the 2022 notes should trade around the same yield.
But all things aren’t equal between these notes, and one of the major disadvantages of the 2022 notes is a lack of liquidity driven by the small amount of outstanding notes. If the market drops or trading dries up, it will be difficult to unload the 2022 notes. However, you are being more than adequately compensated for the lack of liquidity, in my opinion. These notes are more or less just as likely to be repaid as the $1.6 billion notes due 2021 and pay an additional 3.0-3.5% per year of yield. If you are willing to buy and hold, the additional yield can provide significant additional return.
BMC is no longer an SEC reporting company so its results are not publicly available. To review the results you will need to access their investor site. If you are interested in purchasing these notes I encourage you to review their results and risks, which are beyond the scope of this post. This is a highly leveraged company and the ascension of the public cloud may represent serious risks. Nevertheless, I think there are a lot of reasons to consider these for a position in the portfolio.