First Data touts equity infusion, term loan repricing, sees $440 million annual interest savings

By Paul Deckelman

New York, July 30 – First Data Corp. had what its chairman and chief executive officer called “a very, very exciting” 2014 second quarter that included record consolidated and adjusted revenues as well as a considerably smaller net loss from a year ago.

And Frank Bisignano told analysts on the Wednesday conference call following the release of quarterly results by the Atlanta-based electronic transactions processor that the “historic” $3.5 billion injection of fresh equity capital into the closely held company by current and new investors that was announced near the end of the quarter “transforms the capital structure of this company and in many ways is a validation of [its] strategy. It brings great confidence by all to where we’re going and a big, big vote for the business model, the future vision and the opportunities that we have.”

He said that the “most important thing to think about, in completing this equity raise, is that we are able to save $440 million in interest payments” annually at the company’s direct corporate parent, First Data Holdings Inc.

‘A game-changer’

First Data announced on June 19 that First Data Holdings had received commitments to purchase $3.5 billion of its common equity in a private placement transaction. Existing investors had agreed to give First Data Holdings $1.5 billion. Notably, KKR & Co. LP agreed to kick in $1.2 billion of that sum, including $500 million from its 2006 Fund and $700 million from its balance sheet. Meanwhile, the other $2 billion was slated to come from new investors, including a diverse group of pension funds, mutual funds, asset managers and wealthy individuals.

The investment transaction was completed on July 11, a few days after the June 30 end of the quarter.

First Data’s executive vice president and chief financial officer, Ray Winborne – presiding over his last conference call before his previously announced scheduled exit from those positions – called the equity raise “a game-changer.”

He said that the proceeds were being used to redeem nearly $2.2 billion of bonds under equity clawback provisions in their respective indentures.

The company redeemed 35% of its $2.15 billion of outstanding 6¾% first-lien senior secured notes due 2020, or $752.5 million; 35% of its $815 million of 10 5/8% senior unsecured notes due 2021, or $285.25 million; 35% of its $785 million of 11¼% senior unsecured notes due 2021, or $274.75 million; and 35% of its $2.48 billion of 11¾% senior subordinated notes due 2021, or $866.25 million. The 11¾% notes were redeemed on July 11, and the 10 5/8% notes, 11¼% notes and 6¾% notes were redeemed on July 21.

Winborne said that the company would also redeem $1.25 billion of its $1.47 billion of holding company 14½% PIK notes due 2019 with the remaining proceeds from the equity investment plus an additional $350 million that the company raised with its recent repricing of $5.7 billion of term loan debt.

In that latter transaction, completed earlier this month, First Data refinanced an existing $4.25 billion first-lien term loan due March 2018, raising the size of the loan by $350 million to $4.6 billion, keeping the maturity and cutting the interest rate on the loan to 350 basis points over Libor, with no Libor floor, from an original 400 bps over Libor, with no floor.

It refinanced an existing $1.01 billion first-lien term loan due September 2018, keeping the original size and maturity while cutting the interest rate by 50 bps to 350 bps over Libor, with no floor, and also refinanced an existing €311 million first-lien term loan due March 2018, keeping the original size and maturity while cutting the interest rate by 50 bps to 350 bps over Euribor, with no floor.

Interest costs to fall

Winborne said that as a result of all of those transactions – the equity investment and subsequent redemption of the four tranches of bonds, plus the term loan refinancing – “we will reduce total debt through the holdco by $3.1 billion, improving net leverage by 1.2 turns, lowering annual cash interest payments by $228 million and reducing annual pre-tax interest expense by nearly $440 million through the holdco.”

He also noted that as a result of the company’s balance-sheet improvements, Standard & Poor’s upgraded First Data’s first-lien senior secured debt rating and Moody’s Investors Service upgraded its outlook to positive from stable.

According to slides prepared by the company for investor use along with Bisignano and Winborne’s presentations, First Data’s total net debt load at June 30 stood at $23.92 billion, although that was down from $24.43 billion at the end of the year-earlier second quarter. Pro forma for the equity raise and the debt-redemption transactions it undertook, the quarter-end net debt load would come down to $20.84 billion.

Total consolidated interest for the year of $2.13 billion would fall to a pro forma level of $1.69 billion, figuring in the $437 million of annual interest cost savings as a result of the transaction, while cash interest costs originally figured at $1.82 billion would decline to a pro forma level of about $1.72 billion this year. Winborne said this would represent “a slight decline relative to 2013 due to the reduction in debt and the timing of coupon payments associated with refinancing activities.” For full-year 2015, cash interest costs should fall to $1.59 billion, a drop of $228 million from pre-raise levels.

The slides’ data also indicated that the company’s weighted average cost of debt, which rose to 8.15% at the end of the second quarter from 7.96% a year earlier, would fall to a pro forma 7.40% level. Meanwhile, its leverage ratio of net debt as a multiple of adjusted trailing 12-month EBITDA, which had declined to 9.3 times at the end of the second quarter from 10.1 times a year earlier, would continue to shrink to 8.1 times pro forma for all of the transactions.

Winborne said the company ended the second quarter with $548 million of cash and equivalents and no outstanding borrowings under its $1 billion revolving credit facility for available liquidity, after accounting for offshore cash, of $1.3 billion.

It had $298 million of available cash and $973 million of revolver availability, according to the slides’ data.

Cash interest costs for the quarter came to $264 million, about $180 million less than a year ago, primarily due to the timing of coupon payments.

The company expects to take a $260 million earnings charge in the third quarter associated with the early redemption of the bonds that were called, Winborne said.

He further said that the 7.4% average weighted cost of capital represents a 75 bps improvement “over the [pre-raise] status quo.”

He said that as of June 30, 79% of the company’s debt is fixed rate, or swapped to fixed rate, “providing a measure of certainty as interest rates begin to rise.”

During the question-and-answer portion of the conference call following the formal presentations, an analyst inquired about what First Data plans to do with the remaining $216 million of outstanding holdco PIK notes. Might it wait to do anything until after the call price steps down in December?

The CFO replied that “we’ll continue to review the capital structure and liquidity needs, and we’ll make the right decisions for the equityholders and debtholders as those decision points come along.”

However, he added that “you’ve got a good guess there when you look at the step-down in the call premium in December.”

Revenues up, less red ink

For the quarter, First Data reported that its consolidated revenue was $2.8 billion, a new company record, up by $128 million, or 5%, compared to a year ago.

Its adjusted revenue, which excludes certain non-recurring items, grew 4% year over year to $1.8 billion, which also constituted a new record.

Revenues were up in each of its three divisions – merchant solutions, financial services and international.

However, the company remained in the red overall, although the net loss attributable to First Data was $35 million, an 82% reduction from its year-earlier red ink of $189 million.

The improvement was largely driven by a $112 million increase in year-over-year operating profit as well as an $80 million after-tax gain on the sale of its minority interest in Electronic Funds Source, LLC.

© 2015 Prospect News.
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