NCR Corp. is selling its refinancing deal on the promise of expanded software offerings, as its legacy hardware-focused ATM business loses market share amid a global shift toward cashless consumer purchasing habits, according to seven sources following the deal.

And though Atlanta-based NCR has ample free cash flow to contend with industry headwinds for the next few years, the borrower faces longer-term execution and profitability risks as it seeks to grow out of its hardware-first operational approach, the sources continued.

The company this week braved the capital markets for a bond and loan package including a USD 750m delayed-draw TLB due 2026, USD 500m senior unsecured notes due 2027 and USD 500m senior unsecured notes due 2029.

Led by Bank of America, the Ba2/BBB- loan is talked at L+250bps with a 99 OID, with commitments due today (8 August) at 12pm. Meanwhile, the B2/BB eight-year notes priced at 5.75% yesterday, while the 10-year notes priced at 6.125%, in line with talk. The notes were originally slated to price today, but the Wells Fargo-led syndication was accelerated

Proceeds from the deal are earmarked to refinance NCR’s existing revolver borrowings, TLA and 4.625% notes due 2021.NCR also intends to exercise a delay draw of USD 400m on its TLB in December 2019 to repay its 5.875% notes due 2021, when the call premium steps down to par, according to three of the sources.

The rest of NCR’s pro forma capital structure consists of USD 600m 5% senior unsecured notes due 2022 and USD 700m 6.375% senior unsecured notes due 2023.

Pro forma the deal, NCR is 0.9x levered through its secured debt and 3.2x levered through the proposed notes, based on USD 3.116bn of total debt and USD 986m of LTM adjusted EBITDA. Including USD 884m of preferred equity, leverage ticks up to 4.1x.

On a pro forma basis, liquidity stands at USD 1.235bn through USD 335m of cash on hand and a new undrawn USD 900m revolver due 2024.

The company is projected to generate USD 515m of free cash flow in 2019, based on USD 1.045bn of EBITDA, USD 350m of capex and USD 184m of interest expense, according to street estimates.

NCR, for its part, projects it will generate USD 300m – USD 350m of operational cash flow in 2019, based on USD 705m – USD 730m of cash from operations, USD 350m – USD 375m of capex and USD 30m of net cash used in discontinued operations, according to two sources following the deal.

Cashless society

NCR provides software, services and hardware across four segments: banking (51% of LTM revenue), retail (32% of LTM revenue), hospitality (12% of LTM revenue) and other (5% of LTM revenue).

The banking segment focuses on providing ATMs and ATM software, while the retail segment provides self-checkout, retail POS systems and software. The hospitality segment gives customers ordering, payment, loyalty and customer relationship management solutions.

On an LTM basis, NCR’s revenue mix breaks down into 30% software, 37% services and 33% hardware.

The company intends to grow its software and services offerings to nearly 80% of revenue, both of which have higher margins compared to hardware offerings, one of the sources said.

Investors, however, are skeptical the company will be able to fully push a software overhaul, given the company’s reliance on hardware offerings and the backdrop of declining physical banking and retail industries, the sources said.

“It’s definitely a hardware company first, at least it will be for the first few years,” one of the sources said. “The company provides hardware first and then software to drive the hardware.”

With ATM sales accounting for 48% of NCR’s 2018 hardware sales, one of the biggest secular headwinds for the company is the global move to digital payments rather than cash, the sources said.

“While we expect this strategy to drive improved revenue growth and profitability, execution risk remains, as the company is expanding its sales efforts beyond its traditional strength and is encroaching on markets served by industry partners,” Moody’s wrote in a 2 August report.

The number of unique mobile phone subscribers will reach 5.9 billion by 2025, or 71% of the world’s population, giving more access to digital payments globally, according to the GSMA Mobile Economy Report from 2018.

In the US, 29% of adults said that they make no purchases with cash during a usual week, up slightly from 24% in 2015, while the percentage of adults that make all or almost all of their purchases with cash has decreased to 18% from 24% in 2015, according to a December 2018 Pew Research Center survey.

The Harvard Business Review also found that the use of cash for transactions under USD 20 has decreased to 37% from 46% in 2015.

Sources pointed out that in the near-term, Microsoft plans to update the operating system for ATMs to Windows 10 by the end of 2020, which would continue to contribute to new ATM sales, since it would entail new Windows 10-equipped ATM sales. But after the next 18 months, that near-term sales boost would be gone, three sources said.

NCR’s direct competitor for its banking segment is 5.6x-levered Diebold Nixdorf, which had its foray in distress exactly a year ago. But the ATM maker had more company-specific issues to contend with rather than just secular headwinds, the sources said.

Last August, Diebold was facing liquidity and covenant constraints, which led to the company hiring an operational advisor. Less than a month later, the company secured rescue financing and amended its credit agreement.

“Diebold did not have the right capital structure for this business; NCR does,” one of the sources said.

Diebold’s USD 400m 8.5% senior unsecured notes due 2024 last traded at 96.938 to yield 9.314% on 1 August, in line with recent levels. During its distressed period, the bonds traded as low as 54.5 to yield 23.366% in August 2018, according to MarketAxess.

Sources also comped NCR to fellow ATM provider Cardtronics, which is 2.63x levered.

NCR’s eight-year bonds priced in line with Cardtronics’ USD 300m 5.5% senior unsecured notes due 2025, which last traded yesterday at 99.25 to yield 5.653%, in line with recent levels.

2019 Debtwire