* Sept shareholder seen as last hurdle before debt launch
* Dell faces tricky marketing after takeover fight
* Existing bonds structurally subordinated by new debt
By Rachelle Kakouris
NEW YORK, Aug 30 (IFR) - US computer giant Dell Inc
is tipped to launch its jumbo leveraged buyout financing next
month, as it looks to get in ahead of raft of other high yield
issuers and before US Treasury yields rise further.
The sheer size of the estimated USD13.75bln debt financing
means that it will be one of the most high profile deals to hit
the market. Although leveraged loans are expected to take up a
large portion of that, the bond is also likely to be sizeable at
around USD3.25bln and split between first and second lien notes.
"Dell is the Elephant in the room that everyone is talking
about that could potentially move quickly post Labor Day," said
one banker close to the situation.
One portfolio manager, who declined to be named, 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
Dell agreed to go private in February in a USD25bn 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 means that the
financing will now take place in far less favorable conditions.
The market has become choppier on fears that the Federal
Reserve will begin its bond buying retreat as soon as September,
while geopolitical risk has soared over the past week.
A conflict with Syria is now at the forefront of concerns.
"Were bracing for some pretty volatile markets," warns
Gershon Distenfeld, director of high-yield debt at Alliance
"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.
Sources say that the company was originally looking to come
in the early Springtime.
The yield to worst on the closely watched Barclays US High
Yield Index has risen to 6.38% from around 5.2% at the beginning
of May, while underlying rates have spiraled with 10-year
Treasury yields rising to 2.75% from 1.74%.
"It's probably going to cost them more than 200bp from where
they could have funded had it not been delayed," said the
Given the shutdown in primary high-yield since August 16,
Dell could well set a new benchmark for pricing and provide a
barometer for investor appetite for riskier debt, but just how
quickly the deal could be launched remains unclear.
The underwriters - Bank of America Merrill Lynch, Barclays,
Credit Suisse and RBC - would probably like to move before the
next Fed meeting on September 16-17, but a shareholder meeting
to approve the LBO, scheduled for September 12, could be a
The underwriters were either unavailable or declined to
comment on the timing, or whether an extensive roadshow would be
Aside from the general market conditions, Dell also has a
tough story to tell.
During negotiations with shareholders, Dell 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 further downgrades to the
company's credit to contend with, and the likely structural
subordination by the new debt.
Dell's long-dated outstanding bonds took a massive hit when
news of the takeover broke in January. Dell's 5.4% September
2040s, for example, are now trading at 350bp over Treasuries
versus 200bp 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.