Fitch: First Data Corp's Rating Unaffected by $3.5 Billion in Proceeds from Equity Sale

NEW YORK--()--First Data Corp.'s (FDC) announcement that its direct parent company, First Data Holdings Inc., intends to sell $3.5 billion of common equity and dedicate the proceeds towards debt reduction, will not affect FDC's 'B' Issuer Default Rating (IDR), according to Fitch Ratings.

The transaction is favorable to the credit profile; however, the current ratings reflect the company's elevated leverage, which remains high following this transaction. A full list of ratings follows at the end of this release.

First Data Holdings Inc. has received commitments to purchase approximately $3.5 billion of its common equity in a private placement led by KKR. The transaction is expected to be completed by July 11, 2014. KKR has committed to purchase $1.2 billion in equity, new investors have committed $ 2.0 billion and other existing investors will provide the remaining $300 million.

FDC announced its plans to redeem $2.1 billion in various notes (resulting in approximately $200 million in early redemption fees); saving the company approximately $214 million in interest expense per annum. The company has not publicly stated the use of proceeds for the remaining $1.1 billion; however, Fitch believes this remaining balance will be used to further reduce debt. The announced debt reduction plans lower gross unadjusted leverage from 9.8x (including the Holdco PIK notes) to approximately 8.9x. Applying the remaining equity proceeds to debt reduction, Fitch estimates that leverage may be further reduced to 8.6x or 8.5x.

KEY RATING DRIVERS

From an operational perspective, Fitch believes core credit strengths include:

--Stable end-market demand with below-average susceptibility to economic cyclicality;

--A highly diversified, global and stable customer base consisting principally of millions of merchants and large financial institutions;

--A significant advantage in scale of operations and technological leadership which positively impact the company's ability to maintain its leading market share and act as barriers to entry to potential future competitors. In addition, FDC's FS business benefits from long-term customer contracts and generally high switching costs;

--Low working capital requirements typically enable a high conversion of EBITDA less cash interest expense into cash from operations.

Fitch believes credit concerns include:

--Mix shift in the Merchants Solution (MS) segment, including a shift in consumer spending patterns favoring large discount retailers, which has negatively affected profitability and revenue growth and could lead to greater than anticipated volatility in results;

--High fixed cost structure with significant operating leverage that drives profit volatility during business and economic cycles;

--Consolidation in the financial services industry and changes in regulations could continue to negatively impact results in the company's Financial Services (FS) segment;

--Potential for new competitive threats to emerge over the long term including new payment technology in the MS segment, the potential for a competitor to consolidate market share in the MS segment, and the potential for historically niche competitors in the FS segment to move upstream and challenge FDC's relative dominance in card processing for large financial institutions.

--A highly levered balance sheet that results in limited financial flexibility and reduces the company's ability to act strategically in a business that has historically benefited from consolidation opportunities.

Liquidity as of Mar. 31, 2014 was solid with cash of $408.5 million, $173.1 million of which was available to the company in the U.S. FDC has a $1 billion senior secured revolving credit facility which expires September 2016 and had $624.4 million of available borrowing capacity.

Total debt as of Mar. 31, 2014 was $24.7 billion, which includes approximately $326 million of borrowing under the revolving credit facility, $15.6 billion in secured debt, $4.6 billion in unsecured debt, $2.5 billion in subordinated debt, and $1.5 billion in Holdco PIK notes.

The Recovery Ratings (RRs) for FDC reflect Fitch's recovery expectations under a distressed scenario, as well as Fitch's expectation that the enterprise value of FDC, and hence recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation scenario. In deriving a distressed enterprise value, Fitch applies a 15% discount to FDC's estimated operating EBITDA (adjusted for equity earnings in affiliates) of approximately $2.1 billion for the LTM ended Mar. 31, 2014. Fitch then applies a 6x distressed EBITDA multiple, which considers FDC's prior public trading multiple and that a stress event would likely lead to multiple contraction. As is standard with Fitch's recovery analysis, the revolver is fully drawn and cash balances fully depleted to reflect a stress event.

The 'RR2' for FDC's secured bank facility and senior secured notes reflects Fitch's belief that 71%-90% recovery is realistic. The 'RR6' for FDC's second lien, senior and subordinated notes reflects Fitch's belief that 0% - 10% recovery is realistic. The 'CCC/RR6' rating for the subordinated notes reflects minimal recovery prospects in a distressed scenario.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to positive rating action include:

--Greater visibility and confidence in the potential for the company to access the public equity markets.

Future developments that may, individually or collectively, lead to negative rating action include:

--If FDC were to experience sustained market share declines or if typical price compression accelerates;

--If the U.S. economy were to experience a sustained recession.

Fitch rates FDC as follows:

--Long-term IDR 'B';

--Senior secured revolving credit facility and term loans

'BB-/RR2';

--Senior secured notes 'BB-/RR2';

--Junior secured notes 'CCC+/RR6';

--Senior unsecured notes 'CCC+/RR6';

--Senior subordinated notes 'CCC/RR6'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 19, 2013)

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836

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Contacts

Fitch Ratings
Primary Analyst
Rolando Larrondo
Senior Director
+1 212-908-9189
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Brian Yoo, CFA
Associate Director
+1 212-908-0175
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Rolando Larrondo
Senior Director
+1 212-908-9189
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Brian Yoo, CFA
Associate Director
+1 212-908-0175
or
Media Relations, New York
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com