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Dell bond investors feel relief as IPO plan won't add new debt
[NEW YORK] Dell bond investors breathed a sigh of relief on Monday when the computer maker said it will once again go public with a plan that won't add new debt and will simplify its capital structure.
Bonds issued by Dell Technologies rose following the announcement that the world's largest private technology company will offer a new class of publicly traded common stock by buying out its VMware tracking stock, known in the public market as DVMT. The cash and share-swap deal is valued at US$21.7 billion.
Some bondholders had been concerned that a transaction with VMware, of which Dell owns 81 per cent, would require debt financing. The proposed deal avoids that. Dell also said in a call with investors Monday that it's committed to paying down debt and eventually returning to an investment-grade rating.
Dell is financing the transaction through a special VMware dividend, from which the company is collecting roughly US$9 billion of the US$11 billion needed for the deal. The company's capital structure is getting simplified through the elimination of the tracking stock, another positive for creditors, said Jordan Chalfin, a senior analyst at CreditSights.
"There's more certainty going forward on what the structure looks like, and the good thing for Dell is that the company gets 81.4 percent of any future dividend VMware pays, which they can use for debt reduction," he said in an interview. "Dell can do what they want with that money now."
A representative for Dell didn't immediately respond to requests for comment.
Dell's US$4.5 billion of 6.02 per cent bonds due 2026 rose 1.25 US cents on the dollar Monday afternoon in New York, their biggest gain since January 2017. Notes due in 2036 and 2046 also advanced, according to Trace price data. Fitch Ratings and Moody's Investors Service grade the company the highest level of junk.
Round Rock, Texas-based Dell inherited its stake in VMware, a network software company, following its US$67 billion acquisition of EMC in 2016, at the time the largest deal in tech history. The other roughly 19 per cent of VMware is publicly traded as a separate stock.
VMware's shares will remain listed and its bonds will retain their seniority within the capital structure, said Chalfin. "The major concern was that there would be a tie-up of Dell and VMware - like a reverse merger - whereby VMware could be used to support Dell and possibly guarantee its bonds. But they shut that down on the call today. I think that's very favorable for VMware."
VMware's bonds were upgraded to outperform from market perform by CreditSights and the company reiterated its outperform rating on Dell's first lien and unsecured notes.