Business Insight Zone

The current Company of the Day is First Data Corporation.

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With all due respect to its standing in the commercial world, First Data has not made the headlines because of its bread and butter work, which centers around processing check and credit-card transactions. No, First Data is in the news because, back in April of this year, private equity giant KKR (a.k.a. Kohlberg Kravis Roberts) agreed to buy the company out for upwards of $30 billion.

But a funny thing happened on the way to the leveraged buyout. “Leverage” is a synonym for “debt,” and private equity firms like KKR, Blackstone, and TPG use mountains of debts to fund their transactions. That debt is much harder to come by today than it was back in April. In just a few short months, the credit markets have put a huge squeeze on borrowers — even rich, blue-blooded financial firms like KKR. The perceived threat of defaults on loans have spooked banks about the risks they face in lending money under current market conditions. The trouble started in the subprime mortgage market, but by this point it extends even to the pinnacles of corporate finance.

In the case of the First Data, banks’ hesitance has led them to negotiate new terms with KKR. Although the lenders haven’t imposed higher interest rates on Kohlberg, they have extracted a promise (called a “covenant”) from Kohlberg that guarantees a level of minimum financial performance by First Data. Kohlberg should be fine, since (1) the firm is already as rich as Croesus, and (2) First Data look like a good bet to meet its financial targets. The payment processor has posted profits north of $1.5 billion in each of the past three years, and it will be headed, after the buyout, by respected former Compaq and MCI chief Michael Capellas. Still, at this point KKR surely wishes that processing its transaction for First Data would go as smoothly as transactions processed by First Data.

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