Dell Preps for Debt Market Foray -- WSJ
May 11 2016 - 3:02AM
Dow Jones News
PC maker plans to sell $16 billion in high-grade bonds as part
of the package for EMC deal
By Sam Goldfarb
A red-hot market for higher-quality corporate debt is enticing
Dell Inc. to begin marketing the investment-grade-bond portion of
its debt package backing its acquisition of EMC Corp., a person
familiar with the matter said.
The Round Rock, Texas, personal-computer maker plans to start
the sales process for about $16 billion of secured bonds this week,
in an important step for the $60 billion deal.
The company also is expected to sell billions of dollars more of
secured loans and unsecured bonds, although the final mix, size and
timing of debt sales could change with investor appetite and how
much the company raises from asset sales.
The secured-bond plans underscore the surging demand for highly
rated debt, as companies take advantage of ultralow interest rates.
On Monday, investment-grade bond issuance reached $25 billion, the
second-largest daily sum this year and the fourth largest since
2006, according to Bank of America Merrill Lynch Global
Research.
A $16 billion bond deal on its own would be among the largest
this year, ahead of a $12 billion issuance in February from Apple
Inc. though behind a $46 billion deal from Anheuser-Busch InBev NV,
which sold the bonds in January to help pay for its acquisition of
SABMiller PLC.
Announced in October, Dell's acquisition of EMC is expected to
be completed by the fall, pending a vote by EMC shareholders that
is expected to take place next month.
Because banks have already committed to funding its acquisition,
Dell technically doesn't have to get investors to buy any of its
debt. But banks are loath to hold so much debt on their books, and
Dell almost certainly can get better terms from investors than what
the banks have promised the company.
Dell's plans to market its secured bonds were reported last week
by Bloomberg News.
Given the state of the investment-grade market, selling secured
bonds now makes some sense for Dell. A successful syndication -- in
which a group of lenders provides the funds to a borrower -- could
create momentum for other parts of its debt package that have been
expected to be greeted more warily by investors.
A similar scenario played out last July when Charter
Communications Inc. issued $15.5 billion of investment-grade
secured bonds to help fund its acquisition of Time Warner Cable
Inc., clearing the way for it to subsequently issue several billion
dollars more of loans and junk-rated unsecured bonds.
Dell, a private company since its buyout in 2013, isn't a
typical issuer of investment-grade bonds. Its unsecured debt is
expected to receive junk ratings, while its secured bonds and loans
receive investment-grade ratings because they sit higher in the
company's capital structure, giving them a greater chance at a full
recovery in any potential bankruptcy.
Despite its brand name and large market share, Dell faces
challenges adjusting to a new technology landscape, as spending
shifts from personal computers to mobile devices and from corporate
data centers to off-premise cloud services.
Acquiring EMC, a leading data-storage company, is aimed at
giving it a broader platform on which to build, but wouldn't remove
its reliance on products that many analysts believe are facing a
long-term decline.
Preparing for the possibility of a difficult syndication, banks
have set the maximum interest rate for Dell's junk bonds at about
12%, according to people familiar with the matter, meaning the
banks won't have to hold on to the debt as long as investors accept
a yield below that threshold.
One factor in Dell's favor is the long time that investors have
had to prepare for, and even save up for, its debt offering. On
Monday, investors jumped at the opportunity to buy long-awaited
bonds from AbbVie Inc., but gave a somewhat less enthusiastic
response to Chevron Corp., whose presence in the market was less
telegraphed, investors said.
"For those issuers where there is a reasonable amount of lead
time, you're seeing very strong interest," said Jon Duensing,
deputy chief investment officer and senior portfolio manager at
Amundi Smith Breeden, part of European asset manager Amundi SA,
which oversees more than $1 trillion.
Both junk-rated and investment-grade corporate bonds have
rallied in recent months, as recession fears have waned and the
Federal Reserve has assured investors that it is in no hurry to
raise interest rates.
The average yield for corporate bonds in a Barclays PLC
investment-grade index was 3.06% Monday, down from 3.6% in early
February. Yields fall as bond prices rise.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
May 11, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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