|Sampling of First Data Customers|
NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects that proposed limits on debit card interchange fees, as contained in a Senate Amendment passed May 13, should be neutral to First Data Corp.'s (FDC) expected financial performance going forward. The proposed regulation, if passed into law, would limit Visa and Mastercard's ability to determine interchange fees for all card issuers with assets over $10 billion (which the senate estimates at 1% of total card issuers). Instead, interchange fees will be determined by each bank with maximum limits set by the Federal Reserve. The amendment is intended only for debit cards and does not include credit cards.
Fitch does not believe that the proposed regulation directly impacts FDC's Retail and Alliance Services business. Specifically, FDC prices its service to merchants either as a flat fee inclusive of interchange or as a set fee with interchange as a pass through (i.e. interchange plus 20 basis points). In the scenario where FDC prices its service inclusive of interchange, the company would only be negatively impacted if interchange were to increase. In all other scenarios, interchange is effectively a pass through expense.
It is possible that FDC's Star Network (debit card processing) could be negatively affected by the proposed regulation. However, Fitch believes that Star is a relatively minor contributor to FDC's overall cash flow and that the proposed regulation primarily impacts signature debit card transactions which are processed outside of the Star Network.
Furthermore, any negative implications for FDC's Financial Services segment (which includes Star) would likely be offset by potential positive impacts of the proposed regulation. Specifically, the limit on interchange fees could cause more retailers to begin accepting debit/credit cards for purchases which could boost the secular shift to card based transactions. Additionally, a decrease in debit card interchange could incentivize issuing banks to focus marketing efforts on credit cards in lieu of debit cards, by scaling back debit card reward programs for instance. This would positively impact FDC's Retail and Alliance Services business as it typically earns a higher fee on credit card transactions versus PIN debit.
As a final note, FDC's first quarter results were in-line with Fitch's expectations inherent in its May 3, 2010 rating affirmation and press release. As stated in the release and considered in the rating, Fitch does not expect FDC to be positioned for an initial public offering for several years. The company's current debt maturation schedule would likely necessitate an equity offering sometime in the 2013 timeframe but not before, based on Fitch's assumption that free cash flow will increase sufficiently to manage higher cash interest expense beginning in 2012 when the first cash payment is due on the company's senior unsecured 10.55% PIK notes.
Fitch currently rates FDC as follows:
--Long-term Issuer Default Rating (IDR) 'B';
--$2 billion senior secured revolving credit facility (RCF) due 2013 'BB-/RR2';
--$13 billion senior secured term loan B due 2014 'BB-/RR2';
--$3.75 billion 9.875% senior unsecured notes due 2015 'CCC/RR6';
--$3 billion 10.55% senior unsecured notes with four-year mandatory paid-in-kind (PIK) interest due 2015 'CCC/RR6';
--$2.5 billion 11.25% senior subordinated notes due 2016 'CC/RR6'.
The Rating Outlook is Stable.
Total liquidity as of March 31, 2010 was solid and consisted of $731 million in cash and $1.4 billion available under a $2 billion senior secured RCF that expires September 2013. The reduced availability under the RCF reflects approximately $230 million which was provided by an affiliate of Lehman Brothers and is no longer available to be borrowed upon as well as letters of credit and borrowings currently outstanding. Fitch expects approximately $230 million of the existing cash balances to be used for the 5% Rockmount put option on the company's Bank of America joint venture in June 2010.
Total debt as of March 31, 2010 was approximately $23 billion and consisted primarily of the following: i) $12.5 billion outstanding under a secured term loan B maturing September 2014; ii) $293 million drawn on the company's $2 billion RCF which expires September 2013; iii) $3.75 billion in 9.875% senior unsecured notes maturing September 2015; iv) $3.5 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, the parent company of FDC, First Data Holdings, Inc., has outstanding approximately $1 billion original value senior unsecured PIK notes due 2016.
For additional information, please see Fitch's press release 'Fitch Affirms First Data's IDR at 'B'; Outlook Stable' dated May 3, 2010 at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.