Fitch Rates First Data's Sr Secured First Lien Notes 'BB/RR1'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BB/RR1' rating to First Data Corp.'s (FDC) senior secured first lien notes due 2023. FDC's Issuer Default Rating is 'B' with a Stable Outlook. At June 30, 2015, the company had $21 billion in total debt outstanding.

Proceeds are expected to be used to pay down the remaining 7.375% first lien secured notes due 2019, as well as related fees and expenses. Pro forma for the repayment of $955 million of these notes in July 2015 using proceeds from a new term loan, $640 million remained outstanding as of June 30, 2015.

KEY RATING DRIVERS

--Leveraged Capital Structure: The 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. Debt reduction was driven largely by $3.5 billion in equity private placement at First Data Holdings, Inc. (FDC's direct parent, HoldCo) in July 2014, of which $2.2 billion was used to pay down debt at FDC (excluding $214 million in call premiums). Remaining proceeds were used to pay down the 14.5% PIK notes at HoldCo, which as of December 2014, were fully redeemed.

--Fitch believes FDC's execution of a successful initial public offering (IPO) would be a positive development for FDC's credit profile. FDC recently filed a preliminary prospectus regarding an IPO of its common stock, and indicated that the proceeds from the IPO will be used to pay down debt. FDC's reduction in leverage following the debt repayment could lead to a positive rating action, once the debt reduction is completed.

--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 FDC'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 believes that primarily through EBITDA growth First Data's consolidated leverage will decline to approximately 7x by the end of 2017.

RATING SENSITIVITIES

Positive Trigger: An explicit commitment by management to maintain leverage at or below 6x (gross leverage) could merit an upgrade consideration. Future developments that may lead to positive rating action include a greater visibility and confidence in the potential for the company to access the public equity markets, with proceeds used to reduce debt outstanding.

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). FDC 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, FDC's RCF provided an additional approximately $1 billion of liquidity (net of $204 million drawn and $41 million in letters of credit outstanding).

Date of Relevant Rating Committee: April 2, 2015.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

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

Additional Disclosures

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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
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@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
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com