Shareholders at First Data Corp. overwhelmingly approved a $29 billion buyout offer from Kohlberg Kravis Roberts & Co. last week.
The unanswered question is whether bond investors will back KKR’s purchase of the Greenwood Village credit-card processor.
“You hear about all of this (bond) supply – $200 billion – that has to get done. It is not going to get done,” said Sandy Rufenacht, owner of Three Peaks Capital Management, a Greenwood Village money manager that specializes in high-yield bonds.
Bond investors, unable to absorb the avalanche of new corporate issues coming at them, are demanding higher interest rates and stronger covenants to protect them in the case of a default, he said.
KKR’s bid for First Data is one of the largest leveraged-buyout offers this year. Others include Cerberus Capital Management’s takeover of Chrysler, which was completed Friday, and Texas Pacific Group’s buyout of wireless-service provider Alltel.
Sparking the recent buyout frenzy were low interest rates on high-yield bonds that finance such deals and a business environment where many companies have low debt and strong cash flows, making them potential targets.
But corporate high-yield bonds, in the 7.5 percent range at the end of May, now average 9 percent, said Jeff Tjornehoj, a senior research analyst with Lipper in Denver.
A 9 percent yield appears to be the threshold where the leveraged-buyout market freezes, Rufenacht said.
“It is kind of like a snowstorm, where you wonder if you should go out and get your provisions or just settle in and wait it out,” Tjornehoj said. “My hunch is that many deals are going to wait.”
Duques: Deal will get done
Besides waiting, dealmakers can push forward in a difficult market or kill the deal.
First Data chief executive Ric Duques has reassured investors that KKR has the short-term financing lined up to get the deal done by the end of the third quarter, even if bond markets remain hostile.
“Committed bridge financing has been secured for both the debt and equity portions of the transactions,” Duques told analysts on a recent conference call.
First Data moved its corporate headquarters to Greenwood Village in 2001 and employs more than 1,000 workers in Colorado.
Mathew Emmert, founder of the Dividend Gambit, a stock newsletter based in Charleston, S.C., said the surprisingly high defaults in the sub prime-loan markets made bond investors more aware of the risks of taking on high-yield debt.
By pushing forward, First Data will get ahead of another storm on the horizon, troubles at the investment banks that increasingly are putting their own capital on the line, Emmert said.
“They are good at using other people’s money. When they start to show a willingness to put their own capital at risk, all is not right with the buyout market,” he said.
Capellas hire boosts appeal
To strengthen the deal’s appeal to bond investors, KKR hired former Compaq CEO Michael Capellas to replace Duques, who is retiring.
“The First Data deal will happen. The question is, how quickly will KKR be able to put long-term financing in place?” Emmert said.
Rufenacht said he is hearing that bonds to back the First Data deal will test the markets again after Labor Day, but he is doubtful about the reception they will receive.
After a sharp decline in high-yield bond prices, investors can go out and snap up existing issues at a discount.
Why would someone buy a new issue at full price and watch it slide because the private-equity firm overpaid and had to saddle its acquisition with more debt than it could support? he asked.
Higher debt costs have left private-equity firms unable to earn the returns they projected and exposed the buyout prices they offered as too high.
“People have taken it for granted that they will make money on these things, that they will get their money back,” Emmert said.
If KKR decided that the economics of First Data ceased to make sense, it would be on the hook for a $700 million breakup fee.
Rufenacht blames private-equity firms in part for the turmoil rocking corporate bond markets.
Rather than getting feedback and commitments from potential bond buyers, which was the old practice, private-equity firms did deals first based on short-term financing.
They incorrectly assumed that high-yield bond markets would lap up whatever rates and terms they offered, Rufenacht said.
Staff writer Aldo Svaldi can be reached at 303-954-1410 or asvaldi@denverpost.com.
