KKR Buyout Terms May Set the Standard

The truce private-equity giant Kolhberg Kravis Roberts & Co. has reached with its bankers on the financing of First Data Corp. could provide the model for other deals coming to market over the next few weeks.

KKR, known for vowing to hold the line against banks seeking better terms, agreed to make several concessions to bankers, according to people familiar with the matter. But the firm changed the terms largely at the margins. That assured that market attention will remain focused on the $26.4 billion First Data leveraged buyout as the first and most important in a string of coming deals valued at about $400 billion.

First Data "is the canary in the coal mine. If it gets done, then another $350 billion is doable," says the co-head of private equity at one major Wall Street firm. "But if not, then the whole market may plunge, and the rest of the capital markets will react badly."

Sunday night, KKR reached an agreement with its bankers to introduce one covenant, or performance standard, on First Data debt, said the people familiar with the matter. Under the covenant, First Data, a processor of electronic payments, must maintain a certain ratio of earnings before interest payments, depreciation, tax and amortization to its amount of senior debt, these people said. The covenant somewhat reduces risk for investors who buy the debt, though people familiar with the matter say the ratio is modest.

Still, KKR declined to agree to increase fees to the banks to enable them to cut their losses on financing the $24 billion in debt. And more importantly for investors, KKR declined to agree to an increased interest rate on the loans. The concessions were sufficiently toothless, said one banker, to describe them as offering the banks "sleeves on the vest."

The one change the bankers had fought the most fiercely for was for KKR to give ground on the interest rate charged. They argued that First Data is a strong company and by the time KKR sells it, a small increase in interest rates would hardly hurt its overall returns. Their efforts proved unsuccessful.

"First Data has been viewed by many as the deal that would pave the way for other LBO deals to be sold in the market. Unlike many LBOs, the underlying business is strong," said Dave Novosel, an analyst for Gimme Credit LLC, a New York credit-research boutique.

But the fact that KKR moved to appease the market in any way buoyed bankers and could make it harder for other private-equity firms to resist compromising.

It remains unclear, however, whether the modifications will be sufficient for the banks to sell the debt at prices they would like. Most potential buyers have been happy watching from the sidelines. "They think at some point, the banks will conclude that they can't sell at the price they hoped and will dump the debt at more attractive prices," says the head of the financial-sponsors group at one bank.

For weeks, KKR said it wouldn't change the financing contract it had struck with a group of seven banks financing the First Data deal. But behind the scenes, bankers made clear they would work more closely with rival private-equity firms in future deals if KKR refused to make any concessions that they could present to fearful investors.

For now, private-equity firms and bankers will be trying to push through deals already in the pipeline. The banks are expected in October to begin trying to sell off the debt that is part of two more elephantine deals. The first one up is the $24.7 billion buyout of wireless carrier Alltel Corp., which private-equity firm TPG is buying with the private-equity unit of Goldman Sachs Group Inc. TXU Corp., which KKR and TPG teamed up to buy in a $32 billion buyout, should hit the market shortly after that. Shareholders approved that deal last week, leaving regulatory approval as the final hurdle. Both are strong companies with robust and stable cash flows, making them similar to First Data.

The Alltel deal will offer some of its own drama since Goldman will be on both sides of the table -- with the private-equity arm buying Alltel while the capital-markets side finances the debt for the deal. That places top Goldman executives in a delicate position. They will have to decide which side has to make the greater concessions.

First Data's debut sometime this week will be closely watched as a benchmark for the level of pricing for future deals. In recent days, the loan market has become somewhat more stable. The S&P/LSTA Leveraged Loan Index moved into positive territory in August after an unprecedented loss of 3.35% in July. The August move returned the index to the black year to date, thanks to "a growing sense that July's market selloff had created enough value among precorrection loans to draw in nontraditional accounts," according to Standard & Poor's LCD News and Commentary.

The appetite of hedge funds for First Data and other financings will depend on how much they have to pay for the debt and how much money they can borrow from Wall Street. If First Data comes to market, for example, at 95 cents on the dollar, but the banks are willing to lend hedge funds $3 or $4 for every dollar of the hedge funds' own money, the funds can make solid double-digit returns.

Write to Henny Sender at henny.sender@wsj.com

Source : online.wsj.com