S&P Cuts Dell (DELL) to Junk; Removes from CreditWatch; Outlook Stable
Tweet
Share
E-mailGet Alerts DELL Hot Sheet
Up)Join SI Premium – FREE
Standard & Poor's Ratings Services today said it lowered the corporate credit rating on Round Rock, Tex.-based Dell Inc. (Nasdaq: DELL) to 'BB-' from 'BBB', and the commercial paper rating to 'B' from 'A-2'. We removed all ratings from CreditWatch, where we had placed them with negative implications on Feb. 5, 2013. The outlook is stable.
We also lowered our issue-level ratings on Dell's senior unsecured debt to 'B+' from 'BBB', and assigned a '5' recovery rating, indicating our expectations for modest (10% to 30%) recovery of principal in the event of a payment default.
At the same time, we assigned our 'BB+' issue rating to Dell's proposed first-lien secured debt (which includes a $4 billion term loan B due 2020, $1.5 billion term loan C due 2018, and $2 billion first-lien notes due 2020) with a recovery rating of '1', indicating our expectation for very high (90% to 100%) recovery of principal in the event of a payment default. We also assigned our 'BB' issue rating to the company's proposed $1.25 billion second-lien notes due 2021 with recovery rating of '2', indicating our expectation for substantial (70% to 90%) recovery of principal in the event of a payment default.
"The downgrade incorporates our revision of Dell's business risk profile to fair from satisfactory, reflecting ongoing pricing pressures and volume declines in PCs, which is still Dell's largest business by revenue, and also our revision of its financial risk profile to aggressive from modest, pro forma for the significantly higher leverage resulting from the proposed LBO," said Standard & Poor's credit analyst Martha Toll-Reed.
The stable outlook reflects our expectation that Dell will use cash on the balance sheet and free operating cash flow to repay debt on an ongoing basis. Specifically, we expect Dell to repay about $2 billion of debt following the LBO transaction close, such that adjusted total debt to EBITDA is below 5x as of Jan. 31, 2014. In addition, we expect the benefits from ongoing cost reduction and restructuring initiatives will largely offset pricing pressure across Dell's primary business segments.
The potential for higher ratings is currently constrained by Dell's aggressive financial risk profile, weak demand and profitability conditions in Dell's end user and enterprise solutions segments, and lack of revenue and operating performance visibility. Although not likely in the near term, we could lower ratings if a material shortfall in expected revenue and EBITDA levels, or insufficient debt repayments, results in adjusted leverage in excess of 5x.
Key points:
We also lowered our issue-level ratings on Dell's senior unsecured debt to 'B+' from 'BBB', and assigned a '5' recovery rating, indicating our expectations for modest (10% to 30%) recovery of principal in the event of a payment default.
At the same time, we assigned our 'BB+' issue rating to Dell's proposed first-lien secured debt (which includes a $4 billion term loan B due 2020, $1.5 billion term loan C due 2018, and $2 billion first-lien notes due 2020) with a recovery rating of '1', indicating our expectation for very high (90% to 100%) recovery of principal in the event of a payment default. We also assigned our 'BB' issue rating to the company's proposed $1.25 billion second-lien notes due 2021 with recovery rating of '2', indicating our expectation for substantial (70% to 90%) recovery of principal in the event of a payment default.
"The downgrade incorporates our revision of Dell's business risk profile to fair from satisfactory, reflecting ongoing pricing pressures and volume declines in PCs, which is still Dell's largest business by revenue, and also our revision of its financial risk profile to aggressive from modest, pro forma for the significantly higher leverage resulting from the proposed LBO," said Standard & Poor's credit analyst Martha Toll-Reed.
The stable outlook reflects our expectation that Dell will use cash on the balance sheet and free operating cash flow to repay debt on an ongoing basis. Specifically, we expect Dell to repay about $2 billion of debt following the LBO transaction close, such that adjusted total debt to EBITDA is below 5x as of Jan. 31, 2014. In addition, we expect the benefits from ongoing cost reduction and restructuring initiatives will largely offset pricing pressure across Dell's primary business segments.
The potential for higher ratings is currently constrained by Dell's aggressive financial risk profile, weak demand and profitability conditions in Dell's end user and enterprise solutions segments, and lack of revenue and operating performance visibility. Although not likely in the near term, we could lower ratings if a material shortfall in expected revenue and EBITDA levels, or insufficient debt repayments, results in adjusted leverage in excess of 5x.
Key points:
- U.S. computer systems provider Dell Inc. expects to complete its approximately $25 billion acquisition by Michael Dell and Silver Lake Partners in October 2013.
- We are lowering our corporate credit rating to 'BB-' from 'BBB', our commercial paper rating to 'B' from 'A-2', and our issue-level ratings on Dell's senior unsecured debt to 'B+' from 'BBB', and assigning a '5' recovery rating. We are removing all ratings from CreditWatch.
- We are also assigning our 'BB+' issue rating to Dell's proposed first-lien secured debt totaling $7.5 billion, with a recovery rating of '1', and our 'BB' issue rating to the company's proposed a$1.25 billion second-lien notes due 2021 (with recovery rating of '2').
- The stable outlook incorporates our expectation that Dell will use cash balances and cash generation to reduce debt, and that ongoing cost reduction initiatives will largely offset pricing pressures across Dell's primary business segments.
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- IBM tumbles on soft Q1 revenue; announces HashiCorp $6.4bn acquisition
- Dell Technologies (DELL) on the 'cusp of a multi-year revenue acceleration' - Evercore ISI
- China Acquired Recently Banned NVIDIA (NVDA) Chips In Super Micro, Dell Servers- Reuters
Create E-mail Alert Related Categories
Credit RatingsRelated Entities
Standard & Poor's, Silver Lake Partners, Michael Dell, Definitive AgreementSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
