Pulling the levers
Even great businesses can suffer when their capital structure is carrying too much leverage. For executing an astonishing capital turnaround that culminated in a successful IPO, First Data is IFR’s Americas Issuer of the Year.
Just a couple of years ago, First Data didn’t exactly look headed in the direction of awards territory. Saddled with 9.6 times leverage in the wake of its US$27.5bn buyout in 2007 by KKR – one of the largest LBOs in history – the financial data processing company was struggling to add revenue and get out from under its mountain of debt.
But with a remarkable series of capital transactions that included a US$2.8bn IPO this year, First Data reduced its annual interest expenses by US$500m, unlocked major gains in shareholder value – and helped turn its debt profile around.
“The strategy was to opportunistically attack debt on economics,” said Cade Thompson, head of debt capital markets at KKR Capital Markets, “[using] a waterfall process that went from the most expensive to the cheapest debt.”
The overhaul began in earnest in April 2013, when JP Morgan co-COO Frank Bisignano was brought in to lead a turnaround effort that had failed under a series of chief executives after the original LBO.
“The challenges that First Data faced historically were lack of revenue growth that was healthy and that came in many different ways,” said CFO Himanshu Patel, who was brought on board by Bisignano.
“Some of it was market-share challenges, some of it was pricing, some of it was lack of innovation,” Patel told IFR. “For example, we have bought six start-ups since Frank came on board. We have also spent a lot on client-facing teams to build back relationships.”
Chief control officer Cynthia Armine-Klein, head of global business solutions Daniel Charron and head of corporate and business development Christopher Foskett were also among the key management hires recruited away from JP Morgan.
Deleveraging
For all the personnel improvements, dealing with the debt overhang was crucial.
A US$3.5bn injection of additional equity in June 2014 – a US$1.5bn investment from KKR and existing investors (US$700m of which came from KKR’s own balance sheet) and US$2bn from institutional investors – was essential to the deleveraging process.
“The injection of the additional equity allowed us to enter a phase where the business would generate free cashflow as opposed to a static approach toward leverage,” said Ed Law, head of ECM at KKR Capital Markets. “That the existing owners were willing to put in new money served as an important validation of the business.”
For the IPO this year, Citigroup, Morgan Stanley, Bank of America Merrill Lynch and KKR placed 160m shares on the base deal during the second week of October at US$16, well below the US$18–$20 indicative range, with an additional 16m shares sold on partial exercise of the greenshoe.
The public offering was part of an ongoing recapitalisation that allowed repayment of US$510m principal of 11.25% unsecured notes and US$1.6bn of 12.625% unsecured notes all due in 2021.
With US$19.2bn of debt still in place, though, more needed to be done.
“The issue for [equity] investors was not the amount of leverage on the business,” Evan DaMast, head of equity capital markets at Morgan Stanley, said of the IPO. “Investors questioned how much of the US$7bn of debt they were planning to refinance could actually get done – and at what rate.”
In late October, after reporting quarterly results, First Data began marketing an eight-year non-call three senior note issue, through which it was initially looking to raise US$750m to continue refinancing its high-coupon debt. Overwhelming investor demand allowed it to more than quadruple the size of the offering to US$3.4bn. The eight-year notes were priced at 7%.
First Data then returned to the markets the following week to refinance loans and bonds, both of which deals were similarly upsized – even though similarly rated credits at the time were struggling to raise new debt.
Incremental term loans of US$1.25bn and €200m, both maturing in July 2022, were followed by the combined sale of an additional US$3.2bn comprising US$1bn 5% first lien and US$2.2bn 5.75% second-lien notes, both due in 2024.
Overall, the IPO and subsequent transactions saw debt ranging in cost from Libor plus 375bp to 12.625% replaced with US$9.1bn of debt at Libor plus 375bp to 7%. In less than one month, the company had eliminated near-term maturities through to 2018 and reduced annual interest expenses by roughly US$500m.
It was a remarkable transformation.
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