It looks like Dell Inc. may have to pay up to raise the money
for its purchase of EMC Corp.
Barring a major improvement in the bond market, the Round Rock,
Texas, firm likely will pay an interest rate in the neighborhood of
10% in coming months to sell as much as $9 billion of unsecured
junk bonds backing the acquisition, investors and analysts
said.
Soft quarterly results this week at old-guard tech companies
such as Intel Corp. and last month's poorly received debt sale by
disk-drive maker Western Digital Corp. are building expectations of
higher yields for Dell's coming debt issuance, investors and
analysts said. The shift stands to add tens of millions of dollars
to Dell's annual interest expense, analysts said.
At the same time, Dell's money-losing SecureWorks unit sold 8
million shares Thursday in an initial offering at $14 a share,
below expectations.
The developments underscore the increased demands that investors
are making on issuers of risky securities following an intense
market shakeout between Thanksgiving and the end of February. While
Dell has a well-known brand name, rising interest costs stand to
squeeze profits at a time when the firm urgently needs to invest to
keep up with a changing tech landscape, analysts said.
"People realize there's a transformation that's ahead of us, and
people want to get paid for that risk," said Rahim Shad, a senior
high-yield debt analyst at Invesco Ltd.
Negotiations between Dell and debt investors aren't expected to
happen until after EMC shareholders vote on the takeover proposal,
which is anticipated in June. Few on Wall Street expect the deal to
face any significant challenge to closing as planned.
Proceeds from asset sales, such as Dell's recent sale of its
information-technology-services division to Japan's NTT Data Corp.
for about $3 billion, could reduce Dell's borrowing needs, and its
junk-bond borrowing needs may also decline if it is able to raise
more by selling more of other kinds of debt.
Its flexibility won't be unlimited, however. For instance,
issuing a much larger total of secured bonds could jeopardize their
investment-grade ratings, necessitating some issuance of unsecured
bonds that will receive lower ratings because they aren't
collateralized and are more junior in Dell's capital structure.
Dell's underwriters include Credit Suisse Group AG, J.P. Morgan
Chase & Co., Barclays PLC, Bank of America Corp., Citigroup
Inc., Goldman Sachs Group Inc., Deutsche Bank AG and Royal Bank of
Canada.
The potential cost of issuing debt began to rise for Dell at the
end of March, when Western Digital got a chilly reception in
issuing $5.2 billion of bonds to fund its acquisition of SanDisk
Corp.
Western Digital originally planned to issue $4.1 billion of
unsecured bonds, with an interest rate just over 9%. Instead, it
was forced to issue just $3.35 billion of unsecured bonds with a
10.5% coupon, increasing the size of its secured debt to make up
for the difference, according to S&P Capital IQ LCD. The bonds
recently yielded 10.883%, according to MarketAxess, indicating
prices have declined. The bonds bear ratings similar to those
expected for Dell's unsecured bonds.
While Dell and Western Digital occupy different places in the
computer supply chain, the companies have enough in common that the
Western Digital deal was closely tracked by investors and bankers
as an important gauge of what appetite there may be for Dell
debt.
There are ways in which Dell compares favorably with Western
Digital, investors said. In general, the company faces less
competition, and in acquiring EMC-controlled VMware, would gain
ownership of cutting-edge data-center software.
Led by its founder and CEO Michael Dell, who took Dell private
in 2013, the company also is expected to make a stronger pitch to
investors than Western Digital's management team, investors
said.
Still, Dell's leverage, defined as its total debt over earnings
before interest, taxes, depreciation and amortization, is
anticipated to be markedly higher than Western Digital's after Dell
acquires EMC.
Considering that fact, new Dell unsecured bonds could merit a
coupon as high as 11% to 12%, investors said. Even if the company
can make a favorable impression, it could still be left with an
interest rate of around 10%, though market conditions at the time
of the debt issuance could move that number up or down, they
added.
During an earnings call Wednesday, EMC chief Joe Tucci
reaffirmed that the deal with Dell is on track to close within its
original May-to-October target window.
In recent weeks several tech companies, including EMC,
International Business Machines Corp. and Intel, have reported
disappointing first-quarter earnings. Those reports highlight soft
demand for computing hardware, as technology spending shifts from
corporate data centers to cloud services and from PCs to mobile
devices.
Overall, the debt markets are in much better shape than they
were just a few months ago, when fears of a global recession all
but halted new borrowing by businesses with subinvestment-grade
ratings. Average high-yield corporate-bond yields surged in
December and January but have since settled down to about the same
level, between 7.5% and 8%, where they stood when Dell's deal to
acquire EMC was announced in October, according to the Barclays
high-yield index.
(END) Dow Jones Newswires
April 21, 2016 21:15 ET (01:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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