Not The Big, Bad Covenant-Lite Deal, Just, Er, Big

June 11, 2007

I have to admit that upon learning First Data's plans to issue the largest covenant-lite loan deal ever, not to mention the largest junk bond deal ever, equity bridge and all, my journalistic "bad news" radar began to blinkity, blink, blink. You know how we love our drama, tragedy and scandal.

However, after a little research, I've come to the conclusion that in First Data I do not have my poster child for a deal lacking covenants.

The deal is huge, $16 billion in loans - which nearly tops the $16.6 million total for all covenant-lite loans in April - and another $8 billion in bonds, which, until the notes are sold, is being bridged with equity from a bank group led by Citibank and Credit Suisse. (For more details, see Samantha Young's story on page 1.) And the fact that the buy side's insatiable hunger for paper will likely have investors gobbling up the super-sized offering, despite it being only lightly seasoned with covenants, is worth noting.

The company itself, though, doesn't have the kinds of troubles that might make the light covenants questionable. It has performed quite well historically in terms of margins, and its recent revenue growth has been solid, in the 10% area. Indeed, First Data is technically an investment-grade company, whose fallen angel status (still pending from Moody's) is due purely to its buyout by KKR and not to any inherent problems. One analyst predicts that when all is said and done, the company's average rating will be BB+, not exactly a rating that suggests impeding bankruptcy.

Analysts also note that the company's size (current Ebitda is roughly $2 billion) and the fact that capital expenditures are slightly under 20% as a percentage of Ebitda (compared with the sector average of 27% to 30%) are factors that soften the blow of the additional leverage.

One concern that could pose a problem for First Data is whether the financial institutions that make up its clients will want to deal with a company that is below investment grade. But in the end, as long as they're getting serviced and the company's performance remains strong, I can't imagine they would depart in droves.

In short, a lack of covenants on a deal, even one this large, from a company like First Data does not a covenant poster child make. But I have a suspicion my deal will come, if it hasn't already in the form of, say, Univision. And when it does, and the market turns sour, I'll keep my "I told you so's" to myself.

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