KKR's Banks Sell $9.4 Billion of First Data Loans

Sept. 27 (Bloomberg) -- Kohlberg Kravis Roberts & Co.'s banks sold $9.4 billion of loans used for the buyout of First Data Corp. in the biggest offering of high-yield loans since corporate funding dried up in July, according to people with knowledge of the transaction.

Buyers are starting to return to the market after record mortgage foreclosures prompted investors to shun all but the safest debt. Underwriters led by Citigroup Inc. and Credit Suisse Group had to offer a 3 to 4 percent discount to sell the First Data loans, and are still left holding remaining debt to fund the $26 billion buyout of the Greenwood Village, Colorado- based company.

``It's a significant event on the road back to normality,'' said John Pattullo, who manages about $2 billion of mainly high- yield bonds and loans at Henderson Global Investors in London.

Banks for First Data, the biggest processor of credit-card payments, cut the loan sale to $5 billion earlier this month because of a lack of demand. The six banks issued $7.6 billion of the debt at a discount of 4 percent of face value, the people said. A further $1.8 billion was sold at a 3 percent cut, said the people, who declined to be identified because details of the sale are private.

The discounted price represents a loss of about $360 million for the banks before fees. The banks are also hoping to sell $9 billion in high-yield bonds. The banks provided First Data a $2 billion revolving line of credit, which had been parceled out.

Mark Downs

Banks underwriting the financing for LBOs commit to raise the money and earn fees to compensate for the risk of having to take on any debt they can't sell to a wider group of investors. They have to mark down the value of the debt and assume a loss if the price of high-yield loans falls below 100 percent.

Underwriters had about $370 billion in debt they planned to sell as of Sept. 21, according to analysts at Bank of America Corp.

``It's a virtuous cycle,'' said Raja Visweswaran, Bank of America's head of European credit strategy in London. ``The more deals that clear the market, the more confidence from investors and less panic from deal arrangers.''

Leveraged buyouts, which were at a record $613 billion in the first half of the year, slowed to $167.4 billion since then as banks stopped financing new deals, Bloomberg data show. Sales of U.S. leveraged loans declined to a total $12 billion so far this month from more than $50 billion in June, according to Standard & Poor's.

Reluctant to Lend

The European Central Bank in Frankfurt lent 3.9 billion euros ($5.5 billion), the most in almost three years, at its penalty rate today, indicating the fallout from the subprime slump is still making banks reluctant to lend to each other.

The LCDX index, a benchmark indicator for the U.S. leveraged loan market, shows confidence has improved from the low in July. The index has risen 8.1 percent to 97.3 from 90 on July 30, and climbed 0.05 today, according to Goldman Sachs Group Inc.

First Data's loans pay annual interest of 2.75 percentage points over the London interbank offered rate, unchanged since the deal was announced in July.

With a 4 cents on the dollar price discount, that raises the yield to about 4.3 percentage points more than Libor if the loan is called in 3 years, according to data compiled by Bloomberg. A 3 cent discount implies a yield premium over Libor of 3.81 percentage points if called in 39 months.

Mortgage Rout

HSBC Holdings Plc, one of the First Data underwriters, will keep about $2 billion of the loans until the end of the year, according to people familiar with the situation. HSBC spokesman Donal McCarthy in New York declined to comment.

Lehman Brothers Holding Inc., Goldman Sachs Group Inc. and Merrill Lynch & Co. also managed the sale.

New York-based KKR, run by Henry Kravis and George Roberts, agreed to buy First Data in April, before the subprime mortgage rout caused the collapse of collateralized debt obligations that buy leveraged loans.

CDO sales fell to the lowest in more than a year in August to about $16 billion, down from $157 billion in March, the most active month of this year, JPMorgan Chase & Co. analysts said in a Sept. 10 report.

Another KKR deal, the 9 billion-pound ($18 billion) financing for the acquisition of U.K. pharmacy chain Alliance Boots, has languished on underwriters' books since July.

High-yield, or junk-rated, companies have ratings of Ba1 and below at Moody's Investors Service and BB+ and lower at Standard & Poor's. The debt still being prepared for sale may weigh on demand, said John Weaver, a portfolio manager at McGlinn Capital Management in Wyomissing, Pennsylvania.

``It's a pretty scary thing for the market how much supply is out there ready, willing and waiting to come,'' Weaver said. ``People aren't going to forget that.''