S&P Affirms Corp. Credit Rating on Dell Amid Move to Acquire EMC (EMC)

Standard & Poor's Ratings Services today said it affirmed its 'BB+' corporate credit rating on Dell Inc. The outlook is stable.

At the same time, we placed our 'BBB' rating on the senior secured credit facilities of Dell International LLC, a wholly-owned subsidiary of Dell, on CreditWatch with negative implications. We also placed our 'BB+' rating on Dell's senior unsecured notes on CreditWatch with negative implications. Details of the financing terms, including the amount of total debt issuance, the amounts of secured compared to unsecured debt, and the amounts to be issued at each borrowing entity (with possible structural subordination of existing Dell and EMC senior unsecured notes) have not been disclosed. In addition, we placed our 'A' corporate credit rating on Hopkinton, Mass.-based EMC Corp. on CreditWatch with negative implications. We also placed the 'A' rating on EMC's senior unsecured notes and the 'A-1' short-term rating on the company's commercial paper program on CreditWatch with negative implications.

"The affirmation of the corporate credit rating on Dell reflects the company's improved business risk profile as we view the acquisition of EMC strengthens Dell's existing product portfolio to include market leadership positions in PC, servers, storage, and virtualization software, enhances Dell's position as a critical IT business partner with its customers and supply chain partners, improves the company's profitability profile as a result of better product mix, and also enables the opportunities for revenue and cost synergies," said Standard & Poor's credit analyst David Tsui.

Offsetting this factor is our view that the transaction will weaken the company's financial risk profile due to higher debt leverage. Although the transaction should yield cost synergies to the company, the combination of Dell's and EMC's sales forces could present integration challenges.

The outlook on Dell is stable, reflecting our view that Dell will be able to successfully integrate its acquisition of EMC, maintain market leadership, achieve its cost savings goals, possibly sell non-core assets, and also repay debt, leading to pro forma leverage declining to the low-3x area one year after the transaction close.

We would lower our rating on Dell if the company experiences acquisition integration challenges, leading to significantly weaker-than-expected revenue growth and profitability and adjusted leverage exceeding 4x.

We would raise our rating on the company to 'BBB-' if the company is able to execute its plan of achieving the expected cost savings and repay debt, leading to leverage sustained below 3x.

We will continue to monitor the developments and resolve the CreditWatch of the rating on EMC as soon as sufficient information related to the capital structure becomes available, which we expect shortly prior to the close of the transaction. We will resolve the CreditWatch status once the transaction between EMC and Dell closes, at which time we expect to withdraw our corporate credit rating and short-term credit rating on EMC, and continue to rate EMC's senior unsecured notes as part of Dell's capital structure.

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