January 8, 2013 / 10:30 PM / 5 years ago

TEXT - Fitch revises First Data Corp outlook to stable

Jan 8 - 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 

From an operational perspective, Fitch believes core credit strengths include:

--Stable end-market demand with below-average susceptibility to economic 

--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 

--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 

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 


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.
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