With some $24 billion of debt on its books and a struggling business, payment processor First Data Corp. has had more to fear than many others from the looming maturity of its loans and bonds. To get ahead of the issue, the company, which is owned by private equity sponsor Kohlberg Kravis Roberts & Co., in recent weeks has joined the crowd of borrowers working to recast their capital structures. First Data has begun a bond exchange that will affect some $6 billion of its debt, but as it does, the company is juggling the competing need to keep its interest payments as low as possible, forcing it to put off restructuring the bulk of its borrowings.
The maneuvering highlights the balancing act that many overleveraged companies must undertake as they try to manage debt loads taken on during the credit boom. For companies such as First Data, the cost of reducing debt or pushing out maturities to allow more time for repayment is made much more complicated because they have little wiggle room to take on added interest expense.
First Data announced on Nov. 18 an offer to exchange two series of bonds maturing in 2015 for ones maturing in 2021 and 2022. The first series had a coupon of 9.875%, and the other 10.55% notes with a payment-in-kind toggle. Those who exchange by the Dec. 15 deadline will receive either second-lien notes carrying an 8.25% rate due in 2021, 8.75% notes with a PIK toggle due in 2022 or new senior notes with a 12.625% coupon, due in 2021.
The bonds made up some $7.5 billion of the $24 billion in financing that backed KKR's leveraged buyout, but KKR has said it will exchange only $6 billion of the total, leaving itself some options if credit conditions improve and it can exchange the rest at even better terms.
While the move allows First Data to remove a looming maturity wall in 2015 and push it back six or seven years, it leaves untouched the $12 billion in bank debt it has coming due in 2014, which means the bond restructuring is only a first step in a longer process of dealing with the fallout of the LBO. According to one banker, it's unlikely that First Data will do much in the near term to address the issue of the bank debt because it's so cheap. Indeed, the loans are all priced at LIBOR plus 275 basis points. At today's LIBOR rate, at around 30 basis points, the company is paying a hair more than 3% interest on the debt.
For First Data, that extraordinarily low rate is critical to the health of the company. So critical, in fact, that the company is willing to risk the uncertainty of holding on to it and trying to refinance later.
"They're playing a different card game than other companies," says one debt markets banker, noting that companies with lower levels of debt arguably have an easier time simply refinancing loans with bond offerings, even if the strategy results in higher interest rates. Many are willing to do this because they want to get to market before the bulk of a $464 billion wall of maturing debt that is coming due between now and 2016.
But First Data can't afford to put more pressure on its balance sheet. The company's Ebitda in the third quarter was $526 million, and its interest expenses totaled $455.8 million.
That put its Ebitda-to-interest payments ratio at 1.15 times, which means it's barely making enough to meet its interest commitments, even with the rock-bottom interest rates on senior loans. Testament to First Data's operational struggles: The current ratio is actually below the 1.22 times it was when KKR bought the company, which in itself raised eyebrows and marked a high point in borrowing during a boom time when outsized balance sheet debt wasn't uncommon.
Still, the company does have some time to work things out. Banks have signaled a willingness to allow First Data flexibility, having agreed to an amendment to its loan agreements in August that allowed it to issue some $550 million in bonds to take out some term debt.
And the current exchange offer suggests that the market, at least for now, is willing to play along. Standard & Poor's Leveraged Commentary & Data says that more than $6.4 billion of the debt has so far been tendered, putting the company well above its $6 billion threshold.