Fitch Downgrades First Data's IDR to "B"

Press Release: NEW YORK - (Business Wire) Fitch Ratings has downgraded the following ratings for First Data Corp. (FDC):

• Long-term Issuer Default Rating (IDR) to 'B' from 'B+';
• $2 billion senior secured revolving credit facility due 2013 to 'BB-/RR2' from 'BB/RR2';
• $13 billion senior secured term loan B due 2014 to 'BB-/RR2' from 'BB/RR2';
• $3.75 billion 9.875% senior unsecured notes due 2015 to 'CCC/RR6' from 'B-/RR6';
• $3 billion 10.55% senior unsecured notes with four-year mandatory PIK interest due 2015 to 'CCC/RR6' from 'B-/RR6'; and
• $2.5 billion 11.25% senior subordinated notes due 2016 to 'CC/RR6' from 'CCC+/RR6'.

The Rating Outlook has been revised to Stable from Negative.  The ratings downgrade reflects the following considerations:

• The weak global economic environment is expected to lead to a decline in consumer spending in 2009 in the U.S. and many developed economies which is expected to negatively impact FDC's revenue and profitability to a degree not previously anticipated;
• Consumer spending in the U.S. during the economic downturn has been and is expected to continue to be heavily weighted to large discount retailers relative to normal spending patterns which negatively impacts FDC's revenue and profitability as it receives lower payments per transactions from large retailers. Higher growth in PIN debit card usage relative to credit cards (which itself is partly a reflection of the shift in spending to large retailers) has a further, albeit modest, negative impact on revenue and profitability as FDC typically derives slightly lower net revenue per PIN debit transaction than credit;
• As a result of the economic decline and mix shift issues cited above, Fitch expects FDC to report a decline in EBITDA on modest revenue growth in 2009;
• Fitch expects FDC's leverage (total debt to operating EBITDA) to increase to 10.0 times (x) in 2009 from 9.2x at the end of 2008 as debt increases from PIK interest and the previously mentioned expected decline in EBITDA. Prior expectation for a net reduction in debt by 2010 is likely delayed until at least 2011.
• The Stable Outlook reflects the following considerations:
• The aforementioned trends are partially mitigated by a continued shift in mix of payment type to card-based payments which Fitch expects, as a secular growth trend, will continue to enable FDC to grow revenue faster than the broader economy;
• Expectations for positively trending credit protection measures beyond 2009 from profitability improvement and eventual debt reduction;
• FDC remains the largest provider of merchant processing services worldwide with healthy total segment EBITDA margins near 25% and expectations for a return to positive free cash flow (FCF), in excess of PIK interest, in 2011;
• FDC has achieved roughly $300 million of annualized savings as of December 2008, more than originally anticipated. The company expects to recognize an additional $125 million of future annual cost savings in 2009 and beyond, further enabling profitability improvement.

A trend towards the resumption of normalized growth and EBITDA margins is important for FDC in 2010 and 2011 as Fitch believes the company needs to generate sufficient incremental cash flow to manage future higher cash interest expense. Specifically, the company's $3.0 billion of 10.55% PIK notes convert to cash pay after September 2011 and the company's $12.7 billion senior secured term loan will need to be refinanced (or paid down through equity issuance) in September 2014. Fitch believes the growth necessary to meet these future cash needs is reasonably achievable at the current time but susceptible to a prolonged economic downturn beyond 2009.

Positive rating actions could occur as FDC begins to de-leverage its balance sheet and generate positive FCF sufficient to effect a net reduction in debt. Current PIK interest of over $300 million per year enables the company to report positive FCF but has driven increasing debt balances since the 2007 LBO.

Negative rating actions could occur if the economic downturn is longer than expected or mix shift issues continue to negatively impact FDC to a degree that Fitch believes would reasonably be expected to prevent the company from generating enough cash to meet current or future expected levels of cash interest expense.

Liquidity as of Dec. 31, 2008 was adequate with $406 million in cash plus $1.7 billion available under a $1.8 billion secured revolving credit facility which expires September 2013. FDC's cash balance at the end of the year was negatively impacted by a delay in receiving payment on an approximate $246 million receivable which was subsequently received on Jan. 2, 2009.

Total debt as of Dec. 31, 2008 was approximately $22.6 billion and consisted primarily of the following: i) $18 million outstanding under a $1.8 billion secured revolving credit facility expiring September 2013; ii) $12.7 billion outstanding under a secured term loan B maturing September 2014; iii) $3.75 billion in 9.875% senior unsecured notes maturing September 2015; iv) $3 billion in 10.55% notes maturing September 2015 with mandatory PIK interest through September 2011 and cash interest thereafter; and v) $2.5 billion of 11.25% senior subordinated notes maturing September 2016. In addition, a subsidiary of New Omaha Holdings L.P. (the parent company of FDC) has outstanding $1 billion original value senior unsecured PIK notes due 2016. These notes are not obligations of FDC, and FDC provides no credit support of these notes which, as a result, are not included in either the calculation of total indebtedness for FDC or leverage ratios.

Rating strengths include:

• Stable business model, largely driven by growth in the volume of electronic payments which as an increasing mix of overall consumer payment methods, represents a mitigating factor against the risk of a general economic decline;
• Significant portion of FDC's Financial Services revenue stream is under long-term contract, is recurring in nature and carries high contract renewal rates;
• Strong revenue diversification in terms of products and customers with the largest customer representing less than 3.5% of total revenue in 2007. In 2008, only the Financial Services segment had a customer in excess of 10% of segment revenue (12% specifically which includes reimbursable revenue). FDC also benefits from increasing geographic diversification resulting from its higher growth international business;
• Significant growth opportunities in international markets which are heavily fragmented competitively and generally nascent opportunities in terms of the penetration of electronic payments;
• FDC has leading market share in its primary businesses with an inherent advantage in its significant scale and scope of operations relative to its nearest competitors.

Rating concerns include:

• Limited financial flexibility to manage adverse changes to its operating model given leverage (total debt/operating EBITDA) of 9.2x and cash interest coverage of 1.4x as of December 2008;
• The dissolution of Chase Paymentech creates a significant competitor in JP Morgan Chase which did not previously exist in the merchant acquisition space and could lead to market share loss and/or pressure on profitability;
• On-going consolidation among financial institutions could lead to customer losses or pressure on profitability in the card processing business from banks' increased leverage in price negotiation;
• Continued execution risk from data center and processing platform consolidation initiatives which if improperly managed could significantly impair profitability;
• FDC continues to evaluate selective acquisitions, a portion of which could be debt financed.

Fitch does not expect the recently completed dissolution of FDC's Chase Paymentech joint venture to have a material impact on the company's EBITDA and cash flow in the intermediate term. However, a material decline in the business assumed by FDC following the dissolution of the joint venture could negatively impact ratings in the future. In 2007, Fitch estimates that Chase Paymentech's standalone EBITDA was approximately $650 million. FDC held a 49% equity interest in the joint venture.

The Recovery Ratings (RRs) for FDC reflect Fitch's recovery expectations under a distressed scenario, as well as Fitch's expectation that the enterprise value of FDC, and hence recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation scenario. In deriving a distressed enterprise value, Fitch applies a 15% discount to FDC's estimated operating EBITDA (adjusted for equity earnings in affiliates) of approximately $2.5 billion for the latest 12 months (LTM) ended Dec. 31, 2008 which is equivalent to Fitch's estimate of FDC's total interest expense and maintenance capital spending. Fitch then applies a 6x distressed EBITDA multiple, which considers FDC's prior public trading multiple and that a stress event would likely lead to multiple contraction. As is standard with Fitch's recovery analysis, the revolver is fully drawn and cash balances fully depleted to reflect a stress event. The 'RR2' for FDC's secured bank facility reflects Fitch's belief that 71%-90% recovery is realistic. The 'RR6' for FDC's senior and subordinated notes reflect Fitch's belief that 0%-10% recovery is realistic. The 'CC/RR6' rating for the subordinated notes reflects the minimal recovery prospects and inherent subordination in a recovery scenario.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings, New York
Jason Paraschac, +1-212-908-0746
Nick P. Nilarp, CFA, +1-212-908-0649
Melissa Link, CFA, +1-212-908-0611
Media Relations:
Cindy Stoller, +1-212-908-0526
cindy.stoller@fitchratings.com

Fitch, Fitch Ratings, FDC, First Data Corporation, STAR

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