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June 23 (The following statement was released by the rating agency)
KKR & Co. LP's announced $3.5 billion equity injection
into First Data Corp. last week demonstrated the private equity firm's
willingness to draw from its equity resources to potentially improve longer term
value for one of its major portfolio investments, says Fitch Ratings.
The move also showed the flexibility of the company's significant balance sheet
and its ability to execute a very large private capital raise apart from drawing
on its 2006 Fund, the principal vehicle through which KKR acquired First Data in
We view the equity infusion as rating neutral for KKR ('A', Stable Outlook) and
favorable to the credit profile of First Data ('B', Stable Outlook). With KKR's
equity raise, First Data announced a debt reduction targeting $2.1 billion of
notes that would lower gross unadjusted leverage from 9.8x (including the Holdco
PIK notes) to approximately 8.9x. Applying the remaining equity proceeds to debt
reduction, Fitch estimates that First Data's leverage may be further reduced to
8.6x or 8.5x. Despite the reductions, leverage remains high following this
transaction, and is viewed as consistent with the current ratings.
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.
The deal may also represent a needed move that would make IPO underwriters more
confident in executing a sound public offering.
KKR itself (versus its funds or other investors) invested $700 million to fund
the deal, compared to $500 million drawn on from the 2006 Fund directly. Such a
large usage of its own balance sheet increases KKRs exposure to First Data and
represents a point of constraint for KKR's rating. Including the new investment,
Fitch believes First Data will account for approximately 15.9% of KKR's balance
sheet investment portfolio, all else being equal.
As illustrated in the case of First Data, investment managers that focus on
large, leveraged stakes of major corporations may periodically need to commit
further funds, involving significant nominal investment amounts, material
execution risk and sometimes use of the manager's balance sheet. In KKR's case,
the company's very modest debt/equity levels (<0.25x) and strong liquidity
(anticipated to be over $2b post injection) mitigate these risks.
KKR also noted that $2.0 billion of the common raise came from new investors,
including "a diverse group of pension funds, mutual funds, asset managers and
wealthy individuals." While bringing in new investors in such large scale can be
attributed mostly to investors' views of First Data's prospects, it also
represents an achievement for KKR's capital raising abilities and affirms a
benefit of the company's size and reputation.