Why First Data matters(2)

KKR’s negotiations with underwriters of the First Data deal -- the second such mega deal for which banks have had difficulty syndicating the debt -- will be a harbinger of things to come, says Dechert attorney Scott Zimmerman.

Kohlberg Kravis Roberts appears likely to make a concession on the terms of the debt underlying its $29 billion buyout of First Data, people familiar with the matter have told The Wall Street Journal.

Many in the finance world are watching this negotiation as a prognosticate for the restructuring of the approximately $400 billion of leverage still in the pipeline, said Scott Zimmerman, an attorney in Dechert’s corporate and securities practice group.

“This is the first deal that’s coming to market from one of the largest private equity sponsors,” he said. “It has the aggressive terms that were “market” for lending commitments made several months ago; covenant lite and highly leveraged.”

And KKR is notoriously tough on terms, he said.

“They might try to accommodate the lenders a little around the edges, but my guess is not much,” Zimmerman said. “KKR is going to say they have an obligation to their limited partners to deliver on the deal as they negotiated it, and the banks entered into firm commitments.”

Ideally, Zimmerman said, buyers will get comfortable with the paper, and the deal will be successfully syndicated. But for the time being, “it's a bad situation for all the participants.”

First Data is the first major deal close to be negotiated after the summer holidays, and will test the hope held by some that the syndicarion slow-down was simply the result of Wall Street being on vacation.

Citing sources familiar with the matter, the Journal reported that after several days of negotiations with Citigroup, Credit Suisse, Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs and Merrill Lynch, KKR is likely to allow a covenant requiring First Data to maintain a minimum level of earnings before interest, depreciation, tax and amortisation. KKR may make other minor concessions, but it is unlikely to raise the interest rate on any of the debt, the Journal reported.

The debt negotiations are expected to wrap up midweek, according to the Journal. Ultimately, some of the senior debt will likely be sold at 95 cents or 96 cents on the dollar, and the banks will absorb some of the senior debt on their balance sheets. The banks will also likely shelve syndication of the high-yield debt.

Earlier this summer, another KKR transaction was considered a harbinger of things to come: JP Morgan, Unicredit and Deutsche Bank's attempts to syndicate the £9.1 billion ($18.5 billion, €13.4 billion) of debt underlying the firm's LBO of Alliance Boots. Many were watching that deal as well for an indication of the appetite of the debt markets and the future of other debt still in the sydication pipeline. Ultimately the banks had to shelve syndication of the £1 billion second lien tranche indefinitely after  offering it at 96 percent of face value with a yield of 425 basis points. The firm was able to syndicate the senior debt and the mezzanine tranche.