Kohlberg Kravis Roberts & Co. (KKR) has its own investors to answer to. So the idea that the buyout firm would make concessions on the $24 billion (Rs97,440 crore) debt deal for First Data Corp. is curious. KKR has other deals in the market, such as the $44 billion buyout of TXU Corp. If it caved in to banks on First Data, it would set a bad precedent. Moreover, KKR agreed to terms that, presumably, give investors the highest return. Changing such terms might make the deal less profitable.
But there are a couple of reasons why KKR’s so-called concessions, which include adding covenant language to its bank loans, might not be compromised at all. First, the loan documents currently contain no maintenance covenants—or terms that give banks the right to know on an ongoing basis whether First Data’s cash flow, for example, is exceeding a certain minimum level. It wouldn’t affect KKR much if it agreed to a maintenance covenant that set thresholds, which it felt First Data had little chance of breaching. That might be enough for loan investors—who are now demanding such covenants—to check a box, but won’t change the overall profitability of the deal. Banks would be relieved to get the loans off their balance sheets. They aren’t in such a hurry to offload the part of the deal designated for the bond market. This debt, which ranks junior to the loans in the capital structure, contains the really useful features for KKR, such as payment-in-kind (Pik) toggles, which allow First Data to defer cash interest payments. This could help First Data avoid triggering any covenants on the loans anyway, and KKR is unlikely to give it up. Of course these Piks are no longer popular with bond investors, but the banks might be willing to brush over that problem now in order to shove the bank debt out the door.
KKR didn’t make covenant concessions in the US Foodservice or Dollar General deals. And underwriters had to live with Piks on both deals as well. That suggests KKR isn’t going to help its banks unless it feels it already has plenty of financial wriggle room. If it thinks that’s the case with First Data, giving the banks a face-saving covenant that costs it virtually nothing could keep them on side.