Fitch Affirms First Data's IDR at 'B'; Outlook Revised to Positive

CHICAGO--()--Fitch Ratings has affirmed First Data Corp.'s (First Data) Issuer Default Rating (IDR) at 'B'. The Rating Outlook has been revised to Positive from Stable. A full list of Fitch's ratings follows at the end of this release. At June 30, 2015, the company had $21 billion in total debt outstanding.

The affirmation and Positive Outlook reflect First Data's completion of an initial public offering (IPO) on Oct. 15, and expectations that net proceeds of approximately $2.5 billion will be used to reduce debt.

KEY RATING DRIVERS

-- Improved Credit Profile: Pro forma for the post-IPO debt reduction, Fitch estimates total leverage was 7.1x at June 30, 2015, and that leverage could be under 6x at the end of 2017. As previously disclosed Fitch believes expectations for leverage under 6x would likely lead to an upgrade. Fitch expects free cash flow (FCF) to improve materially following the debt reduction and through debt refinancings in 2015 and potential future refinancings.

-- Leveraged Capital Structure: The current rating reflects FDC's highly leveraged capital structure. As of June 30, 2015, total and secured leverage were 7.9x and 5.8x, respectively. Fitch notes that leverage has materially declined from 10.6x in 2010 as a result of debt reduction and EBITDA growth.

-- Large Operational Scale: The Global Business Solutions business is characterized by its large scale and global footprint with more than six million merchants. Existing merchant relationships and large distribution platform (alliances and partnerships) reinforce the company's ability to sustain its market share while providing a segue to introduce and capitalize on emerging technologies (i.e. Apple Pay, Clover, EMV, and Mobile Payments). The Global Financial Solutions business also benefits from this scale and established relationships with card issuers as well as from long-term contracts which have high switching costs.

-- Diversified Customer Base: The customer base is global in nature and consists primarily of millions of regional and local merchants and large financial institutions. Fitch notes, however, that FDC is exposed to price-sensitive merchants within small- and medium-sized businesses that are more susceptible to down cycles.

-- Fee Structure Offsets Cyclicality: Revenue has a correlation with consumer spending, but volatility is subdued due to the continued adoption of electronic payments, exposure to consumer staples, pricing model (paid per transaction as well as on a percentage of transacted amount) in Global Business Solutions, and contractual nature of fees (based on activity level) in Global Financial Solutions.

-- Spending Shift: A mix shift in consumer spending patterns favoring large discount retailers that have more leverage to negotiate favorable fees has pressured profitability and revenue growth. Fitch notes that this is mitigated by increased spending online that can generate high fees due to the higher risk associated with the transaction.

-- Financial Industry Consolidation: Consolidation could pose a risk for the company, particularly in FDC's Global Financial Solutions segment, as could changes in regulations in First Data's overall business.

-- Emerging Competition: The high barriers to entry could be eroded by the emergence of new payment technology in the Global Business Solutions segment. Conversely, the Global Financial Solutions segment has much lower exposure to emerging competitors due to First Data's strong position in card processing for large institutions.

KEY ASSUMPTIONS

--Fitch assumes revenues will grow in the low- to mid-single digits over the near term, and that First Data's EBITDA margin will be relatively stable in the 24% to 25% range. Fitch's assumptions for the EBITDA margin are based on gross revenues, which include material reimbursable expenses.

--Fitch believes that through EBITDA growth and debt reduction First Data's consolidated leverage will decline to approximately 5.9x by the end of 2017.

RATING SENSITIVITIES

Positive Trigger: The ratings could be upgraded if First Data's credit profile continues to strengthen, and leverage is expected to be maintained at or below 6x (gross leverage). Future developments that may lead to positive rating action include sustained EBITDA growth and reductions in debt from the company's improved free cash flow position.

Negative Trigger: The ratings could be downgraded if First Data were to experience erosion in its market share or if price compression accelerates due to new competitive threats leading to sustained EBITDA margins at approximately 20% or below with negative free cash flow generation.

LIQUIDITY AND DEBT STRUCTURE

Liquidity as of June 30, 2015 consisted of $348 million in cash (net $92 million in amounts held outside the U.S. and at subsidiaries to fund their respective operations). First Data also has a $1.25 billion revolving credit facility (RCF) that expires in June 2020 (subject to an earlier springing maturity if certain debt remains outstanding at certain dates). As of June 30, 2015, First Data's RCF provided an additional approximately $1 billion of liquidity (net of $204 million drawn and $41 million in letters of credit outstanding).

Fitch has affirmed the following ratings and revised the Outlook to Positive on the IDR:

--IDR at 'B'; Positive Outlook;

--Senior secured RCF and term loans at 'BB/RR1';

--Senior secured notes at 'BB/RR1';

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

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

--Senior subordinated notes at 'CCC/RR6'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992660

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992660

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
John Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian Yoo, CFA
Associate Director
+1-212-908-0175
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
John Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian Yoo, CFA
Associate Director
+1-212-908-0175
or
Committee Chairperson
David Peterson
Senior Director
+1-312-368-3177
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com