Banks to Test Debt Market This Week

By MICHAEL J. de la MERCED and ERIC DASH
This week will offer the first big test of the credit market as seven banks try to entice investors to buy $24 billion in loans and bonds to pay for the sale of the First Data Corporation, the credit card payments processor, to the private equity firm Kohlberg Kravis Roberts.

All summer, bankers have sweated on Wall Street. Instead of spending time at the golf course or at their summer houses, many found themselves in the office trying to make sense of the credit market shutdown that had left their companies responsible for the billions of dollars used to finance leveraged buyouts, yet facing uncertain prospects of getting investors to take some of the debt off their hands.

But the deal for First Data is expected to provide the first true litmus test for the credit markets.

Unlike with Home Depot, First Data is not suffering from a slump in its industry, one that would set in motion what is called a material adverse change clause — allowing the deal to be broken without penalty. And the five banks backing the buyout have no escapes from their financing agreements, leaving them on the hook if they cannot sell the company’s leveraged loans and bonds.

Analysts see the First Data offering as one of the most aggressively structured. Part of the offering is expected to include so-called covenant-lite loans, which place few restrictions on how much debt the company can assume, and pay-in-kind toggles, or bonds that can be repaid by issuing more notes. Since the middle of the summer, investors have rejected both as unacceptable, forcing banks to restructure offerings or withdraw them and wait for improved marketing conditions.

Still, if investors warm to the First Data sale, other deals may find welcome receptions. “If a big deal can get done, that in and of itself becomes a catalyst for positive momentum,” Justin B. Monteith, an analyst at KDP Investment Advisors, said.