Fitch Downgrades First Data's IDR to 'B+' on KKR LBO; Rates $15B Bank Debt 'BB/RR2'

Business Wire, Sept 17, 2007

NEW YORK -- Upon conclusion of its review of First Data Corp.'s (FDC) new capital structure for the expected close of its leveraged buy-out (LBO) transaction with Kohlberg Kravis Roberts & Co.'s (KKR), Fitch Ratings has taken the following rating actions on FDC:

--Long-term Issuer Default Rating (IDR) downgraded to 'B ' from 'BBB' and removed from Rating Watch Negative;

--$2 billion senior secured revolving credit facility due 2013 rated 'BB/RR2';

--$13 billion senior secured term loan B due 2014 rated 'BB/RR2'.

Fitch has also affirmed, removed from Rating Watch Negative and subsequently withdrawn FDC's 'BBB' senior unsecured debt rating as it is expected that these notes will be fully tendered upon close. Fitch has also affirmed and withdrawn FDC's 'F3' short-term IDR and commercial paper ratings. The Rating Outlook is Stable.

The new 'B ' IDR and Stable Outlook reflect the following considerations:

--FDC's substantially higher leverage and debt service requirements following the completion of the leveraged buyout (LBO) with Fitch-estimated proforma leverage of approximately 9 times (x) (total debt to operating EBITDA) and interest coverage (Operating EBITDA/total interest) slightly above 1x (cash interest coverage expected to be approximately 1.5x) with minimal free cash flow (FCF);

--Fitch believes the high profitability, stability, and cash flow generation ability of FDC's business in various economic cycles should enable the company to service its significant pro forma debt.

--FDC's sufficient liquidity position with limited term loan amortization and no debt maturities until 2013;

--Fitch expects that future FCF will be used to reduce debt although this may have no immediate effect on leverage due to approximately 15% of total debt financing consisting of PIK notes;

--Fitch believes that FDC has opportunity to expand its profitability margin through planned cost reductions, which along with significant revenue growth opportunities internationally, should enable the company to increase EBITDA and free cash flow leading to reduced leverage over the next several years.

Rating strengths include:

--A stable business model with low correlation to economic cycles as revenue is generally driven by the increasing volume of electronic payments rather than the dollar volume of overall consumer transactions;

--A significant portion of revenue from long-term customer contracts with a high percentage of recurring revenue partially mitigates the risk of significant credit erosion;

--Strong customer diversification with the largest customer in 2006 representing less than 3% of total revenue; and

--Leading market share across its business units with a significant competitive advantage in scale and scope of operations.

Rating concerns include:

--Limited financial flexibility due to an aggressive capital structure;

--Reduced ability to invest, particularly through acquisitions, in further international expansion as well as new payment technologies which Fitch believes pose a longer-term competitive threat;

--The potential for continued and increased pricing pressure in FDC's financial institutions segment which, due primarily to customer consolidation, faces on-going competition from customers choosing to in-source processing

--Inherent execution risks in FDC's plans to consolidate payment processing platforms and data centers; and

--A transition risk in bringing in a new outside CEO, Michael Capellas, post transaction close, who's management team will have to execute quickly and accurately given the company's limited financial flexibility.

Fitch may further downgrade FDC if:

--FDC management does not execute on its data center consolidation plans and/or fails to improve the profitability of the company near-term via cost cuts;

--There is a further increase in leverage beyond 2008 driven by incremental PIK interest exceeding debt redemption due to either a shortfall in FCF or alternative use of funds, such as for acquisitions.

Conversely, Fitch may consider positive rating actions if FDC:

--Utilizes proceeds from potential asset sales or divestitures to redeem debt; or

--Executes on projected cost savings on time which should drive increased FCF to fund further debt reduction.

Liquidity proforma for the close of the transaction is expected to be adequate with approximately $500 million in cash and $1.8 billion available under a $2 billion senior secured credit facility maturing in 2013. Fitch expects FDC to generate minimal free cash flow in the first year following the close of the transaction.

Debt proforma for the close of the transaction is expected to be approximately $23 billion consisting of a $13 billion senior unsecured term loan B due 2014; $6.5 billion drawn on a senior unsecured 12-month bridge facility expiring approximately September 2008; $2.5 billion drawn on a senior subordinated 12-month bridge facility expiring approximately September 2008; and $1 billion of senior unsecured PIK notes due 2016 issued at a holding company and structurally subordinated to all other existing debt. FDC has bank commitments in place that require the bridge facilities to either be replaced or converted into equivalent 8 year notes. Approximately $2.75 billion of the senior unsecured debt is expected to be PIK notes including an equivalent portion under the senior unsecured bridge facility. Fitch expects to rate and assign recovery ratings to each of these debt instruments once further clarity is provided regarding the timing of issuance.