Fitch Affirms First Data's IDR at 'B'; Outlook Revised to Stable
Fitch Ratings has affirmed the Issuer Default Rating (IDR) for First Data Corp. (FDC) at 'B' and revised the Rating Outlook to Stable from Negative.
The revision in Rating Outlook reflects the following:
--Since 2011, FDC has extended over $6 billion of secured term loans due in 2014 to 2017 and beyond. The company has approximately $1.5 billion in unsecured notes due in 2015 which Fitch believes can be reasonably extended and at least partially repaid. This has sufficiently extended the window the company has to grow EBITDA and look for an opportunity to access the public equity markets to effect a recapitalization of the company. Importantly, FDC does have $2.5 billion in subordinated notes as well as $2.7 billion (maturity value) in PIK notes at the parent company due 2016 which represents the next significant maturity wall.
--FDC achieved surprisingly strong EBITDA growth during the latest 12-month (LTM) period given numerous economic headwinds. Fitch estimates EBITDA of $2.35 billion for the LTM period, up 12.2% over the prior year period (up approximately 7.5% when excluding the impact lower debit network fees had on the business in the LTM). The strong EBITDA growth was achieved despite only 3.3% revenue growth (on a segment basis which excludes reimbursable expenses among other items). FDC has a high fixed cost structure which can generate significant operating leverage, positive and negative. In recent years management has successfully demonstrated its ability to drive operating leverage gains (while also reducing overall expenses) that did not materialize in the years initially following the leveraged buyout in 2007. Fitch estimates leverage at 9.6x currently, down from 10.9x a year ago.
Fitch estimates free cash flow (FCF) for the LTM period at $423 million, roughly half of which was generated from working capital changes. Sustainable FCF of $200 million-plus, though, is stronger than what Fitch expected at the beginning of the year. When coupled with modest revenue growth expectations going forward, FDC could generate enough cash to repay a sizeable portion of its roughly $1.5 billion in 2015 maturities. Fitch believes that the 2016 maturities represent the next meaningful refinancing wall for the company. Fitch also believes that it is possible, given FDC's current growth trajectory, that it could potentially recapitalize in a public equity offering before those notes need to be refinanced.
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 Financial Services 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 operational credit concerns include:
--Mix shift in the Retail Services segment, including a shift in consumer spending patterns favoring large discount retailers, 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 would typically drive volatility in profitability 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 segment;
--Potential for new competitive threats to emerge over the long term including new payment technology in the Retail Services segment, the potential for a competitor to consolidate market share in the Retail Services segment, and the potential for historically niche competitors in the Financial Services segment to move upstream and challenge FDC's relative dominance in card processing for large financial institutions.;
--Management is compensated in large part with equity. If FDC's outlook continues to deteriorate, the value of this compensation could decline considerably, which enhances the risk that executives could look to leave the company. Management turnover has been an issue for FDC over the past few years and additional turnover could be damaging.
From a financial perspective, Fitch believes core credit strengths include expectations that FDC will use the majority of excess free cash flow for debt reduction. Credit concerns include a highly levered balance sheet that results in minimal financial flexibility and reduces the company's ability to act strategically in a business that has historically benefited from consolidation opportunities.
Liquidity as of Sept. 30, 2012 was solid with cash of $470 million ($212 million of which was available to the company in the U.S.) and $1.46 billion available under a $1.52 billion senior unsecured revolving credit facility, approximately $500 million of which expires September 2014 and the rest in September 2016. Fitch estimates that FDC generated approximately $423 million in FCF over the LTM period which further adds to liquidity.
Total debt as of Sept. 30, 2012 was $22.7 billion, which includes approximately $15.6 billion in secured debt, $4.5 billion in unsecured debt and $2.5 billion in subordinated debt (all figures approximate). In addition, a subsidiary of New Omaha Holdings L.P. (the direct parent company of First Data Corp.) has outstanding $1.75 billion senior unsecured PIK notes due 2016. These notes are not obligations of FDC and are not consolidated.
For an in-depth review of Fitch's credit analysis and outlook for FDC, please see the report published June 6, 2012.
Fitch has affirmed the ratings for FDC as follows:
--Long-term IDR at 'B';
--$499 million senior secured revolving credit facility expiring September 2013 at 'BB-/RR2';
--$1.0 billion senior secured revolving credit facility expiring September 2016 at 'BB-/RR2';
--$252 million senior secured term loan B due 2014 at 'BB-/RR2';
--$2.7 billion senior secured term loan B due 2017 at 'BB-/RR2';
--$4.7 billion senior secured term loan B due 2018 at 'BB-/RR2';
--$750 million senior secured term loan B due 2018 at 'BB-/RR2';
--$1.6 billion 7.375% senior secured notes due 2019 at 'BB-/RR2';
--$510 million 8.875% senior secured notes due 2020 at 'BB-/RR2';
--$2.2 billion 6.75% senior secured notes due 2020 at 'BB-/RR2';
--$2 billion 8.25% junior secured notes due 2021 at 'CCC+/RR6';
--$1 billion 8.75%/10.0% PIK Toggle junior secured notes due 2022 at 'CCC+/RR6';
--$784 million 9.875% senior unsecured notes due 2015 at 'CCC+/RR6';
--$748 million 10.55% senior unsecured notes due 2015 at 'CCC+/RR6';
--$3 billion 12.625% senior unsecured notes due 2021 at 'CCC+/RR6';
--$2.5 billion 11.25% senior subordinated notes due 2016 at 'CCC/RR6'.
The Rating Outlook is Stable.
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 $2.4 billion for the LTM ended Sept. 31, 2012 which is equivalent to Fitch's estimate of FDC's total interest expense and maintenance capital spending. 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 the minimal recovery prospects and inherent subordination in a recovery scenario.
WHAT COULD TRIGGER A RATING ACTION
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:
--The ratings could be downgraded if FDC were to experience sustained market share declines or if typical price compression accelerates;
--The ratings could also be downgraded if the U.S. economy were to experience a sustained recession.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 8, 2012;
--'Evaluating Corporate Governance', dated Dec. 12, 2012;
--'Rating Global Technology Companies Sector Credit Factors', dated Aug. 9, 2012;
--'U.S. Leveraged finance Spotlight', dated June 6, 2012..
Applicable Criteria and Related Research:
U.S. Leveraged Finance Spotlight -- First Data Corporation
Jason Paraschac, CFA, +1 212-908-0746
One State Street Plaza
New York, NY 10004
Jamie Rizzo, CFA, +1-212-908-0548
Michael Paladino, CFA, +1 212-908-9113
Brian Bertsch, +1 212-908-0549 (New York)