The Long and Short

FIS tender creates opportunity to swap to FI

| March 1, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Fidelity National Information Services (FIS: Baa2/BBB/BBB) has launched a tender offer to repurchase up to $2.25 billion in debt across multiple currencies. The corporate action is likely the first in several attempts to buy back debt this year as management tries to reduce debt by about $10 billion. The source of funds for the debt reduction would be the approximately $12 billion in net proceeds from the Worldpay transaction that closed earlier this month. It seems much of the credit upside at FIS is already priced in when looking at spreads relative to closest peer Fiserv (FI: Baa2/BBB). Given some of the compelling tender premiums offered on the debt FIS is looking to retire, it looks like a good opportunity to rotate into Fiserv. Furthermore, FI’s recent $2 billion issue across three tranches gives investors the necessary liquidity to execute potential swaps.

Exhibit 1. Much of the FIS upside from debt reduction appears to be priced in

Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications

While it is encouraging to see FIS management waste little time starting to improve their capital structure, it is worth noting that the company has also committed to raising their share buyback target to $4.0 billion through year-end from $3.5 billion in the prior year. It demonstrates that while debt reduction is a priority, the company needs to balance those ambitions against potential shareholder remuneration. In their fourth-quarter earnings presentation management stated that the breakdown of Worldpay proceeds would be roughly $9 billion toward debt reduction and $3 billion to share repurchases. However, it is the balance of operating cash flows moving forward that becomes less certain. FIS is projecting full-year 2024 EBITDA in the $4.10 billion to 4.14 billion range, with very decent margins in the 40.6% to 40.8% range.

FI maintains a comparable credit profile to FIS but offers much more compelling valuation in the intermediate part of the curve (Exhibit 2). This is in part due to some perceptions about potential event risk at FI, which has a proven appetite for growth through acquisitions. However, the bulk of those acquisitions tend to be smaller, strategic bolt-on initiatives that do not have a material impact on the company’s debt metrics. Also, there are some perceptions that FI is subject to activist shareholder pressure that also seem very oversold. Specifically, activist ValueAct owns a 1% stake in the company and has previously made attempts to get FI shareholders to consider a potential spin-off of the Clover point-of-sales platform. Clover, along with Carat, account for a vast amount of transactions in the merchant business, but management has held fast in its commitment to these platforms as part of its overall business strategy. Furthermore, the 1% stake does not currently place ValueAct among the top ten position holders in FI equity. Therefore, these perceptions of FI as a higher event risk entity appear overblown.

Exhibit 2. FIS and FI bond curves with current price indications – includes prospective tender pricing from FIS press release

Source: Santander US Capital Markets LLC, Bloomberg/TRACE Spread indications, Company Filings

The FIS tender offer expires on Monday March 4, 2024 at 5:00 pm eastern time. There is no early tender date or early tender premium associated with the offer. Only the first three and a portion of the fourth priority levels on the tender waterfall are guaranteed participation in this offer, assuming the unlikely circumstance that all participants in those tranches validly tender. More realistically, there will still be opportunities for debt issues lower on the waterfall to take advantage of the attractive tender levels relative to their current valuations.

By taking advantage of the timing of the offer, alongside the available liquidity in the new FI issues outstanding, investors can maximize the spread pick between the two similarly-rated issuers, while maintaining identical exposure to the services segment of the technology sector within the IG index. Below are a few sample ideas for how investors can choose to execute with comparable maturity profiles; however, there are plenty of opportunities to execute swaps out of FIS into FI and either shorten or lengthen their duration in the process, depending on what the investor is seeking to accomplish. Staying within the intermediate segment of the curve appears the more effective way of maximizing overall yield in one or more of these potential swap opportunities. Investors that are sensitive to dollar price can adjust accordingly or perhaps choose to target FI issues other than the recent new deals in order to avoid a pay-up in real dollars relative to the FIS tender prices.

Exhibit 3. Sample Tender Swap Opportunities

Source: Santander US Capital Markets LLC, Bloomberg/TRACE Spread indications, Company Filings

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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