Fitch: Assessing LBO Risk at First Data Corp

Business Wire, March 7, 2007

NEW YORK -- Due to heightened investor interest in technology leveraged buyouts (LBOs), and a widening of the credit default swap spread for First Data Corp., Fitch Ratings has examined LBO risk for the company by assessing the level of bondholder protection provided by bond indentures, specifically change of control provisions and limitations on secured debt. Fitch notes that existing bank credit facilities are usually refinanced and therefore, in general, provide limited protection to bondholders, specifically for event risk such as an LBO. In addition, Fitch has evaluated expectations for projected company growth rates, consolidation trends, free cash flow profile following an LBO, and First Data's ability to support meaningfully higher leverage.

Fitch has concluded that First Data's bondholders have limited protection in the event of an LBO. All of First Data's current notes outstanding are based on a single indenture which provides minimal restrictions on additional secured debt aside from requiring existing unsecured debt to be equally and ratably secured. Fitch believes that First Data's bond indenture also does not provide a change of control provision nor does it stipulate financial covenants or restrict asset sales. Limitations on incurring additional unsecured debt apply only to restricted subsidiaries with a maximum in aggregate of 15% of consolidated stockholders' equity allowable, which Fitch estimates to equal approximately $1.5 billion.

Fitch's LBO model projects positive free cash flow and a modest internal rate of return (IRR) for potential equity sponsors, which could support First Data as an LBO candidate. However, Fitch believes a purchase multiple in excess of 13 times (x) would be challenging along with the resultant reduction in financial flexibility which could limit the company's ability to continue its acquisition strategy, particularly in international markets, which are strategically important for future growth. First Data has estimated it plans to spend $500 million to $750 million in acquisitions in 2007, which is well beyond Fitch's estimate of $290 million in pro forma free cash flow for 2006 in an LBO scenario. First Data is also planning to consolidate its data center infrastructure over the next several years in order to improve the company's overall cost structure. These plans could eventually require greater capital spending than estimated in Fitch's model but could also lead to unexpected improvements in EBIT margin, which would have a positive impact on the projected IRR in the LBO analysis. Additionally, the company is currently searching for a successor to its current CEO, which could also affect potential LBO consideration. As a result of all the aforementioned factors, Fitch believes there is a higher likelihood of First Data pursuing a recapitalization instead of an LBO, which would result in credit rating downgrades.

Fitch's LBO model considers the current equity market value plus an equity premium of 20%, assumption of existing debt, and transaction and converted share and option costs equal to 3% and 1.5%, respectively, of the controlling equity value. Transaction funding assumes the LBO sponsor contributes 30% of the equity; Fitch's estimate of excess cash is applied to the purchase price and any residual value is funded with debt. Total interest expense is based on the pro forma debt balance, an interest rate of 9.5%, and a tax rate of 35%. Fitch estimates pro forma leverage and interest coverage metrics relative to EBITDA, cash flow from operations, and free cash flow excluding any previously paid dividends. Fitch tests the sensitivity of these credit metrics to changes in assumptions, including equity contribution, equity premium and free cash flow. Fitch derives an LBO sponsor's IRR assuming a three-year investment horizon, all projected FCF (free cash flow) is used for debt reduction, and the sponsor sells the company for the same transaction multiple it paid originally. No intermediate cash flows from assets sales or special dividends to the sponsors were contemplated in the model.

Fitch currently rates First Data as follows:

--Issuer Default Rating (IDR) 'A';

--Senior unsecured debt 'A';

--Senior credit facility 'A';

--Commercial paper (CP) 'F1'.

The Rating Outlook is Stable.

The brief report 'First Data Corp. LBO Analysis' provides a detailed LBO scenario as well as additional analysis on First Data's bond indentures. The report can be found on the Fitch Ratings web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. 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.