Fitch Affirms First Data's IDR at 'B+'; Outlook Negative
2008-11-20 02:03:01 -
Fitch Ratings has affirmed the following ratings for First Data Corp.s (FDC):
--Long-term Issuer Default Rating (IDR) at 'B+';
--$2 billion senior secured revolving credit facility due 2013 at 'BB/RR2';
--$13 billion senior secured term loan B due 2014 at 'BB/RR2';
--$3.75 billion 9.875% senior unsecured notes due 2015 at 'B-/RR6'.
In addition, Fitch has assigned the following ratings:
--$3 billion 10.55% senior unsecured notes with four-year mandatory PIK interest due 2015 'B-/RR6'.
--$2.5 billion 11.25% senior subordinated notes due 2016 'CCC+/RR6'.
The Rating Outlook has been revised to Negative from Stable.
The Negative Rating Outlook reflects the following considerations:
--FDC's broad exposure to consumer credit and consumer spending trends in the US and internationally, particularly Europe, combined with Fitch's expectations for a significant decline in consumer spending in 2009 in addition to a continued tight consumer credit environment, both of which should weigh heavily on overall debit and credit card transaction volume.
--These trends are partially mitigated by a continued shift in mix of payment type to card-based payments which Fitch expects, as a secular growth trend, will continue to insulate FDC from general economic weakness.
--However, given the potential magnitude and duration of the expected decline in consumer spending, Fitch believes it is possible FDC could experience flat to declining revenue in 2009 which would push out any expected net reduction in total debt beyond 2010.
--Further, Fitch believes FDC is negatively impacted by the current shift in consumer spending to large discount retailers where FDC receives a significantly lower profit per transaction. Additionally, any acceleration of the growth in debit card transactions, which carry a lower profit than credit card transactions for FDC, resulting from declining consumer credit availability, would also negatively impact results.
A rating downgrade could occur if the magnitude and duration of expectations for the U.S. and global economies continue to decline beyond current expectations of a moderate recession lasting into 2009. A further deterioration in economic conditions could result in a meaningful increase to FDC's leverage as EBITDA would remain flat or decline with total debt increasing through paid-in-kind (PIK) interest and the potential need to draw on the company's revolving credit facility. Additionally, a greater than one quarter trend of declining credit and debit card transaction volumes would likely lead to a ratings downgrade as this would signal a change in consumer buying patterns well beyond considerations currently supporting the ratings.
The ratings affirmation reflects the following considerations:
--FDC has achieved modest reductions in leverage since its leveraged buy-out (LBO) in September 2007. Fitch estimates leverage (Total Debt/Total Operating EBITDA) at 8.8 times (x) as of September 2008 versus 9.4x at the time of the LBO. The leverage decrease has been driven by modest EBITDA growth which has offset increased debt totals resulting from PIK interest on a portion of FDC's debt.
--FDC has achieved $360 million of annualized savings as of September 2008, roughly $100 million more than originally anticipated. The company expects to recognize an additional $150 million to $200 million of future technology cost savings. Fitch believes that continued profitability improvements could be constrained by minimal to declining revenue growth in 2009.
--Fitch believes that with modest revenue growth in 2009 and 2010, FDC could generate sufficient free cash flow to reduce total debt by 2010.
--Fitch does not expect the recently completed dissolution of FDC's Chase Paymentech joint venture to have a material impact on the company's EBITDA and cash flow. However, a material decline in the business assumed by FDC following the dissolution of the joint venture could negatively impact ratings in the future. In 2007, Fitch estimates that Chase Paymentech's standalone EBITDA was approximately $650 million. FDC held a 49% equity interest in the joint venture.
Liquidity as of Sept. 30, 2008 was adequate with $579 million in cash plus approximately $1.5 billion available under the company's $1.8 billion secured revolving credit facility which expires September 2013. The credit facility was originally a $2 billion committed facility, $230.6 million of which was provided by an affiliate of Lehman Brothers. The $307 million of drawings was in large part a result of a cessation of cash dividend payments from Chase Paymentech during the year as well as $100 million of corporate cash in the Reserve Primary Fund which was not accessible. The balance outstanding on the revolving credit facility was repaid subsequent to the September 2008 quarter end.
Total debt as of Sept. 30, 2008 was approximately $22.8 billion and consisted primarily of the following: i) $307 million outstanding under a $2 billion secured revolving credit facility expiring September 2013; ii) $12.8 billion outstanding under a secured term loan B maturing September 2014; iii) $3.75 billion in 9.875% senior unsecured notes maturing September 2015; iv) $3 billion in 10.55% notes maturing September 2015 with mandatory PIK interest through September 2011 and cash interest thereafter; and v) $2.5 billion of 11.25% senior subordinated notes maturing September 2016. In addition, a subsidiary of New Omaha Holdings L.P. (the parent company of First Data Corp.) has outstanding $1 billion of senior unsecured PIK notes due 2016. These notes are not obligations of FDC, and FDC provides no credit support of these notes which, as a result, are not included in the calculation of total indebtedness for FDC nor leverage ratios.
Rating strengths include:
--Stable business model, largely driven by growth in the volume of electronic payments which as an increasing mix of overall consumer payment methods, represents a mitigating factor against the risk of a general economic decline;
--Significant portion of FDC's Financial Services revenue stream is under long-term contract, is recurring in nature and carries high contract renewal rates;
--Strong revenue diversification in terms of products and customers with the largest customer representing less than 3.5% of revenue in 2007, excluding reimbursables, as well as increasing geographic diversification from higher growth international business;
--Significant growth opportunities in international markets which are heavily fragmented competitively and generally nascent opportunities in terms of the penetration of electronic payments;
--FDC has leading market share in its primary businesses with an inherent advantage in its significant scale and scope of operations relative to its nearest competitors.
Rating concerns include:
--Limited financial flexibility to manage adverse changes to its operating model given leverage (total debt/operating EBITDA) of 8.8x and interest coverage of 1.3x as of September 2008;
--Continued execution risk from data center and processing platform consolidation initiatives which if improperly managed could significantly impair profitability;
--On-going consolidation among financial institutions could lead to customer losses or pressure on profitability in the card processing business from banks' increased leverage in price negotiation;
--The dissolution of Chase Paymentech creates a significant competitor in JP Morgan Chase which did not previously exist in the merchant acquisition space and could lead to market share loss and/or pressure on profitability;
--FDC continues to evaluate selective acquisitions, a portion of which could be debt financed.
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 $2.6 billion for the latest 12 months (LTM) ended Sept. 30, 2008 which is equivalent to Fitch's estimate of FDC's total interest expense and maintenance capital spending. Fitch then applies a 6 times 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 reflects Fitch's belief that 71%-90% recovery is realistic. The 'RR6' for FDC's senior and subordinated notes reflect 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.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww ... 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 Ratings, New York
Jason Paraschac, +1-212-908-0746
Nick P. Nilarp, CFA, +1-212-908-0649
Melissa Link, CFA, +1-212-908-0611
Cindy Stoller, +1-212-908-0526 (Media Relations)
mailto:cindy.stoller@fitchratings.com
