NEW YORK, Jan 16 (IFR) - As talks have advanced to take Dell
Inc private, analysts say the computer giant will have to take
on billions of dollars more in debt - and may even face a
ratings downgrade to junk.
The mooted leveraged buyout of Texas-based Dell
would be one of the largest LBOs ever, considering the company's
current market capitalization of $21 billion.
Some estimate a purchase price of as high as $25 billion,
meaning that sponsors would need to raise about $15 billion in
capital to complete the deal.
That figure would be based on rolling in the equity of
founder Michael Dell as well as a limit on leverage of three
times EBITDA, said Morningstar analyst Michael Hodel.
If half of that capital comes out of the $14.2 billion of
the company's cash and investments on hand, it would be left
with gross debt of about $14 billion after the buyout, Hodel
said in a report.
"That balance sheet wouldn't be awful, but it would require
that Dell stabilize its operating performance in relatively
short order and begin paying down debt," he said.
The buyout would also significantly change the character of
the company's existing roughly $9 billion of investment-grade
While Dell is currently rated A- by Standard & Poor's and A2
by Moody's, the outstanding bonds would be downgraded to reflect
the increased leverage risk after a buyout.
One leveraged finance syndicate banker who asked not to be
named said Dell could be demoted to double-B - the highest-rung
of the high-yield, or junk, category.
In fact, Dell's CDS or credit default swaps - essentially
the price investors pay to protect against a company defaulting
on its debt - are already trading at a level that implies a
double-B rating for the company.
But any downgrade would still have relatively little impact
on Dell's ability to tap the capital markets for funding in the
months ahead, the bond syndicate banker said.
"A company like Dell could tap a lot of different sources,"
he said. "What these headlines have done is make people take
notice that a deal of this size could be financed in this
Indeed, Dell would likely be able to tap sources including
the pro-rata market, which is comprised of term loans A and
revolver facilities, the term loan B market and asset-based
market, as well as both secured and unsecured notes in the bond
"The leverage is pretty low, so you could maximize all of
those different buckets," the banker said. "Given that some of
these deals lately have had very big order books, when you put
it all together, you could raise $12 billion to $15 billion of
debt for a real blue-chip name."
News of the buyout plan has put a floor under Dell shares,
which were trading at $12.61 on Wednesday, up 15.9% since the
beginning of the week.
But without language in the company's existing bonds about
change of control, some are trading below par value since talk
of the buyout emerged.
Spreads on Dell's 5.875% notes due 2019 were trading 97
basis points (bp) wider on Wednesday at Treasuries plus 352
basis points, and the 4.625% notes due 2021 were 64bp wider at
355bp over Treasuries.
The Dell 5.4% notes due 2040, meanwhile, were trading at
87.5 cents on the dollar, after starting the week at 105.50.
In addition to having an impact on Dell's current debt, the
buyout talk has revived talk in the market about a genuine
revival of LBOs, which have been few and far between since the
onset of the global financial crisis in 2007.
Dell's would be the largest buyout since that year, when
another Texas company, energy utility TXU, carried out a $45
billion leveraged buyout, that was the biggest ever.
The average option-adjusted spread on the Barclays
high-yield bond index - currently around 471bp, its lowest level
since May 2011 - is one of the best indicators for LBO activity,
said Marty Fridson, CEO of New York-based financial firm Fridson
"The key to the story is that the cheaper it is to finance
LBOs, the more LBO financing gets done," Fridson said in a
"Present conditions point to a significant increase in LBO
volume over the 2011-2012 level, but not to anything like the
record level of 2006-2007," he said.
In both 2011 and 2012, the weekly average of the spread was
right around 600bp - and LBO volume in the United States was
$100 billion in each year.
In the peak LBO years of 2006 and 2007, the spread averaged
325bp and 361bp, respectively, and LBO volume was roughly US$600
billion per year.
At the current level, Fridson estimates, there would be
around $132 billion in LBO volume this year.
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