Crafted in the form of a private placement of common stock from existing and new investors, the $3.5 billion will help lower First Data’s gross unadjusted leverage to about 8.9x EBITDA from 9.8x EBITDA, including Holdco PIK notes, according to a fresh comment from Fitch Ratings.
First Data’s debt-to-EBITDA ratio looks even better when factoring in remaining equity proceeds to debt reduction. On this basis, Fitch estimated that First Data’s leverage may be further reduced to 8.6x or 8.5x EBITDA.
First Data has been sapped by its debt payments, a big component of its $732 million loss in the 12 months ended March 31.
KKR’s $3.5 billion contribution includes $1.5 billion from existing investors and $2 billion from pension funds, mutual funds, asset managers and wealthy individuals. It clearly marks a win for First Data CEO Frank Bisignano, hired by KKR last year after working as co-COO of JPMorgan Chase & Co.
“We view the equity infusion as rating neutral,” Fitch Ratings said. “KKR’s injection typifies the realities of operating a major private equity firm, which demands a willingness and ability to recognize the potential need to right-size portfolio companies’ leverage prior to IPOs or other forms of exit.”
Meanwhile, Moody’s Investor Service took a more upbeat take by noting First Data’s adjusted EBITDA may approach $3 billion by the end of 2015, up from more than $2.5 billion now. Other upside could come from international expansion and new payment technologies such as its Clover offering, a cloud-based point-of-sale system for merchants. Moody’s lifted its ratings outlook to positive from stable.
“First Data will generate…higher EBITDA growth through 2015 with modest economic growth and increased operating leverage through higher transaction and card issuance volumes,” Moody’s noted.
KKR also may be taking a step to avoid the slightly higher risk of a debt default faced by big LBOs prior to the 2008 financial crisis.
A study by Moody’s pointed out the default rate of 10 mega-deals from the top 14 private equity firms, that involved more than $10 billion of debt, stands at about 17.8 percent from 2008 and 2013, compared to a benchmark rate of 6.4 percent.
While no one is talking about a default at First Data, extra-large LBOs of its class remain out of favor, for the most part. Even after healthy fundraising and a sustained economic recovery this year, the title of the largest LBO so far in 2014 belongs to a buyout team led by Cerberus Capital Management LP for grocery chain Safeway Inc at about $9.2 billion. That’s less than a third of the the lofty price of $29 billion for First Data in September 2007.