S&P Downgrades EPIQ Systems (EPIQ) to 'B+'; Financial Risk Profile Revised to 'Aggressive'

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Kansas City, Kan.-based Epiq Systems Inc. (Nasdaq: EPIQ) to 'B+' from 'BB-' and removed it from CreditWatch, where we placed it with negative implications on Sept. 23, 2014, following the company's announcement that it is reviewing strategic alternatives, which could include acquisitions, divestitures, and a going-private or recapitalization transaction. The outlook is negative based on the company's review of its ongoing strategic alternatives that may result in leverage above 5x.

We also lowered our issue-level ratings on the company's $100 million first-lien revolving credit facility and first-lien $300 million term loan to 'B+' from 'BB-', and removed them from CreditWatch, where we placed them with negative implications on Sept. 23, 2014. The recovery rating remains '3', indicating our expectation for meaningful (50% to 70%; lower end of the range) recovery of principal in the event of a default.

"We based our downgrade primarily on our revision of Epiq's financial risk profile to 'aggressive' from 'significant,' reflecting Standard & Poor's adjusted leverage, pro forma for the acquisition of Iris Data Services, near the mid-4x area," said Standard & Poor's credit analyst Sylvester Malapas.

"The rating reflects our view of the company's business risk profile as 'weak,' based on a relatively narrow market focus in a niche market, and exposure to the cyclical bankruptcy market," he added.

The negative outlook reflects our view that actions determined by the strategic review still pose a risk to the company's financial risk profile. Additionally, we expect strength in the eDiscovery business to be temporarily offset by the company's bankruptcy and settlement segment, which could result in mid-single-digit organic operating revenue performance over the next 12 months.

We could lower the rating if the company sustains adjusted leverage above 5x due to adoption of a more aggressive policy or eroding profitability.

We could revise the outlook to stable if actions determined by the strategic review do not result in adoption of a more aggressive financial policy. We will review our expectations for operating performance and Epiq's financial policy before resolving the negative outlook.

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