Investors Brace For Dell’s High-Profile Jumbo LBO Financing

The sheer size of the estimated $13.75 billion debt financing will make it one of the most high profile deals to hit the market. Although leveraged loans are expected to take up a large portion of the financing, the bond is also likely to be sizable at around $3.25 billion split between first and second-lien notes.

“Dell is the elephant in the room that everyone is talking about,” said one banker close to the situation.

A portfolio manager said the market had the capacity to absorb the bond.

“The real interest is the high profile of the company, the actual fight, the fact that it is a fallen angel, and from a risk standpoint, the fact that it has to transform itself,” the manager said.

Dell agreed to go private in February in a $25 billion deal led by founder Michael Dell and private equity firm Silver Lake and Microsoft Corporation. A subsequent battle for the business between Dell and activist investor Carl Icahn has meant that the financing will take place in far less favorable conditions than initially intended. Icahn has since bowed out of the bidding.

However, the market has become choppier on fears that the Federal Reserve will begin to taper its bond buying program this month, while geopolitical risk has soared in recent weeks. A conflict with Syria is now at the forefront of concerns.

“We’re bracing for some pretty volatile markets,” said Gershon Distenfeld, director of high-yield debt at Alliance Bernstein.

“Besides the Syria situation and some potential problems in emerging markets, there is a lot of uncertainty surrounding the US debt ceiling and Fed tapering,” Distenfeld said.

Dell was originally looking to come to market in early spring. Since that time, the yield-to-worst on the Barclays US High Yield Index has risen to 6.38 percent from around 5.2 percent at the beginning of May, while underlying rates have spiraled. Ten-year Treasury yields touched a two-year high of 3.01 percent last Friday, up from 1.74 percent in May.

“It’s probably going to cost them more than 200 basis points from where they could have funded had it not been delayed,” said the portfolio manager.

The underwriters – Bank of America Merrill Lynch, Barclays, Credit Suisse and RBC -are likely keen to move before the Fed meeting on September 16-17, but are unable to launch before a shareholder meeting to approve the LBO, scheduled for September 12..

The underwriters were either unavailable or declined to comment on the timing of the deal.


Aside from general market conditions, Dell has a tough story to sell. During negotiations with shareholders, the company argued for a lower price because the computer market is shrinking, but bondholders may use that as leverage to demand higher coupons.

Then there are the expected downgrades to the company’s credit to contend with, and the likely structural subordination the new debt will create.

Dell’s long-dated outstanding bonds took a hit when news of the takeover broke in January. Dell’s 5.4% September 2040s, for example, are now trading at 350 basis points over Treasuries versus 200 basis points in early January.

In keeping with high-grade convention, Dell’s existing bonds do not have change of control covenants, a clause that would have offered investors significant protection.

“Suddenly you are facing major problems as an existing bondholder,” said Steven Oh, head of global credit and fixed income at Pinebridge Investments.

If total leverage rises sharply, the company’s investment-grade ratings are expected to slide into junk territory, which may create forced selling by certain investors.

Moody’s downgraded Dell to Baa1 from A2 in February and warned of a multi-notch downgrade if the deal goes ahead, while S&P, which lowered Dell’s corporate credit and senior unsecured debt ratings to BBB from A- in May, expects its corporate credit rating outcome likely to be no higher than BB.

“The existing bonds are going to be subordinated to all of the new debt so not only has the business been levered and the debt downgraded, you are now being pushed down the capital structure,” said Oh.

Rachelle Kakouris is a reporter for IFR in New York