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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 2007.
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.