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Did KKR Blink?

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Just how much of a “concession” on the part of Kohlberg Kravis Roberts’ was its agreement to put a maintenance covenant in the buyout loans for First Data. Yesterday’s Wall Street Journal reported it as a major triumph for the banks committed to making the loans, writing “KKR has blinked.”
That interpretation has been directly challenged by DealBook’s Michael J. de la Merced who began his item on the addition of the covenant with the words: “Kohlberg Kravis Roberts has not blinked.”
“K.K.R. appears to have agreed to a covenant without any real teeth,” de la Merced writes. “Calling the development a ‘concession’ is overstating the case, a person with knowledge of the discussions told DealBook. The $24 billion offering for First Data’s debt will still include pay-in-kind toggles, an investor-unfriendly kind of bond which allows interest payments to be made by issuing more notes.”
When we posted on the addition of a covenant yesterday, DealBreaker readers took a position largely consistent with DealBook’s interpretation. One fact that stood out to many readers is that the PIK-toggle seems to have stayed in place, allowing First Data to make interest payments on its loans by issuing new debt. KKR is unlikely to let a leverage ratio covenant render the PIK toggle ineffective, which implies that the covenant will have to be very loose to allow for the new debt.
So its possible that the covenant may be nothing more than what some would call “optics”—a change meant to make the deal appear better from the perspective of investors without changing the substance.
“And First Data can’t afford real maintenance tests either,” de la Merced adds. “Normally, if a company fails to meet its performance requirements, it must meet with its lenders, who can demand payment in exchange for a waiver. But because of its newly razor-thin margins, First Data would be hard-pressed to pay up if it failed to meet its earnings criteria.”
A Concession in the First Data Deal? Hardly [Dealbook]