Although the multibillion loan and bond financing was essentially a difficult turnaround story as CEO Michael Dell and private equity firm Silver Lake Partners took the firm private, the books were strong for the loans and bonds.
Cash continues to pour into the US leveraged market despite the Federal Reserve Bank’s decision not to taper which has caused leveraged loan yields to tighten and is allowing pricing to be reduced in a ‘borrower friendly’ market.
Strong investor demand allowed Dell to cut the pricing on its covenant-lite loans and increase their size to cover a reduced first-lien bond and cancel an expensive second-lien bond. A euro-denominated loan was also added after reverse inquiry from European investors.
Dell’s $9.10 billion loan, the second-largest US institutional loan of the year after Heinz’ $9.5 billion buyout financing, has been seen as a major barometer of investor sentiment since its launch in early September.
The positive response to the deal is a reflection of the strength of the US leveraged loan market which is seeking high levels of covenant-lite loans, which offer little protection for investors, and riskier second lien loans that are both typical of a bull market.
Several other US companies were also able to reduce pricing and cut financing costs on US leveraged loans last week.
These include building materials manufacturer CPG International, security company Allegion, Australian catering and cleaning company Spotless and oil and gas company Fieldwood Energy.
Fieldwood Energy’s financing, which backs its US$3.75bn acquisition of Apache Corporation’s Gulf of Mexico shelf business, also featured a $1.75 billion, seven-year second-lien term loan which is the largest second-lien loan of the year.
“The US leveraged loan market is as hot as it has ever been,” a source said.
Dell’s ability to syndicate its loan at tight spreads is remarkable as investors were initially confused about the company’s prospects in a difficult and competitive sector.
Business had slumped but investors were reassured by a BB credit rating and a conservative debt structure backed with a large equity check and Microsoft money.
There was little doubt about the ability of the US leveraged loan market to place a deal of Dell’s size as investors have been starved of paper and have been waiting for large new-money loans. The final result on Dell, however, was better than expected.
Dell reduced its first lien bonds to $1.5 billion and canceled an expensive $1.25 billion second-lien bond.
The loan financing now consists of a $1.5 billion five-year Term Loan C (TLC), a $4.66 billion 6.5-year Term Loan B (TLB), a 700 million euro TLB and a $2 billion asset-based revolving credit.
The covenant-lite loans priced at the tighter end of guidance at 275 basis points (bps) over Libor on the $1.5 billion TLC, 350bps on the $4.66 billion TLB and 375bps over Euribor on the 700 million euro TLB.
Bankers described the pricing of 275bps on the TLC as very tight for such a large loan. The paper softened in the secondary loan trading market as a result, falling to 99.375-99.75 percent of face value, but remained within fees.
An extra $150 million in balance sheet cash was also added to supplement equity from Michael Dell and other parties and new equity from Silver Lake, Michael Dell, and MSD Capital, an investment firm created to manage the capital of Michael Dell and his family.
The financing package also includes a 7.25 percent, 10-year subordinated bond of up to $2 billion from Microsoft, and roughly $7.8 billion of cash on Dell’s balance sheet.
Bank of America Merrill Lynch, RBC, Barclays, Credit Suisse, and UBS arranged the term loans and revolver.
Tessa Walsh is global loans editor for RLPC