September 19, 2017 / 8:17 PM / a year ago

Fitch: Dell Technologies' Ratings Unaffected by Credit Facility Repricing

(The following statement was released by the rating agency) CHICAGO, September 19 (Fitch) Fitch Ratings believes the ratings for Dell Technologies Inc., including the 'BB+' Long-Term Issuer Default Rating (IDR) and Stable Outlook, will be unaffected by the company's repricing of certain of its outstanding term loans and revolving credit facility (RCF). Dell is proposing a 25-bp margin reduction on up to $3.78 billion of replacement Term Loan A-2 due Sept. 7, 2021, $1.80 billion of replacement Term Loan A-3 due Dec. 31, 2018, and $3.15 billion of replacement RCF expiring Sept. 7, 2021. This should result in more than $25 million of annual interest expense savings. All other terms and conditions of the replacement loans are unchanged. Fitch currently rates $53 billion of total debt, including the undrawn $3.15 billion RCF, Dell's share of VMware Inc.'s (VMware) recent $4 billion senior notes offering net of the repayment of $1.23 billion of inter-company debt, and Dell's repayment of the $1.5 billion bridge loan associated with the VMware inter-company loan. The ratings and Stable Outlook reflect: FCF Debt Reduction Priority: Fitch expects Dell will continue to prioritize debt reduction (other than debt related to the financing business and VMware) and the company has repaid roughly $9 billion of gross debt reduction since closing the EMC Corp. acquisition a year ago. VMware's $4 billion senior notes issuance on Aug. 14, 2017 was modestly leveraging for Dell on a consolidated basis, although Dell used proceeds from VMware's repayment of $1.23 billion of legacy inter-company notes, along with cash on hand, to prepay the associated $1.5 billion mirror bridge loan. Dell has more than $3 billion of legacy senior notes due in the first half of fiscal 2019 and, in conjunction with term loan amortization and prepayments with FCF or net proceeds from incremental asset sales, core leverage (total debt/operating EBITDA, excluding debt and profitability related to Dell Financial Services) should approach 4x exiting fiscal 2018 and 3.5x exiting fiscal 2019. Share-Gains Driven Revenue Growth: Fitch expects low-single-digit overall intermediate-term revenue growth, driven in large part by continued share gains amidst challenging demand environments and revenue synergies from the EMC acquisition. Fitch expects strong operating performance in the Client Solutions Group (CSG) segment from continued unit and revenue share consolidation by the top 3 personal computer (PC) providers, as well as higher peripherals and service attach rates. While PC units grew year-over-year in the first calendar quarter of 2017 for the first time since 2012, Fitch still expects low-single-digit unit declines for all of 2017. Fitch also expects Dell to gain share in enterprise servers given the company's recent new product-set launch, despite tepid enterprise spending as customer focus IT investments on software-defined, hyper-converged and hybrid cloud. Mixed ISG Performance: Despite solid performance in industry-standard servers, Fitch expects overall performance from Dell's Infrastructure Solutions Group (ISG) will remain mixed from uneven buying patterns by large cloud server providers (CSP) and negative revenue trends in mid-range legacy storage technologies more than offsetting robust adoption of new storage solutions. Fitch expects CSPs white-boxing hardware will also remain a headwind in ISG. Rapid growth in all flash arrays (AFA), hyper-converged, and software-defined solutions are more than half of Dell's storage business but remain insufficient to offset negative demand trends for traditional and hybrid solutions over at least the near term, despite Dell's efforts to increase sales capacity for mid-range storage solutions and strengthen the company's storage positions in fiscal 2018. Hybrid Cloud Drives VMware: VMware should continue its strong operating performance, driven by robust adoption of the company's networking, hybrid cloud and software-as-a-service (SaaS) offerings. Fitch expects VMware will grow by mid- to high-single digits overall and double digits in hybrid and SaaS, leveraging the company's large and diversified installed base of virtualization and management customers. VMware's $1 billion of cross-selling opportunities with Dell, given historically low penetration rates, should also boost organic revenue. Solid operating EBITDA growth at VMware should benefit Dell's credit protection measures, given Fitch credits Dell with 81.4% of VMware's operating results. However, Fitch's rating case does not assume dividends or incremental inter-company loans to Dell, although Fitch believes the absence of restrictions on restricted payments and inter-company loans in VMware's senior unsecured notes indenture provides Dell with mechanisms to access VMware's cash. At the same time, Fitch recognizes the leakage resulting from dividends on the VMware Class A common stock may reduce its likelihood. Profit Expansion Headwinds: Fitch expects operating EBITDA growth and margin expansion from Dell's $2 billion of acquisition-related annual cost synergies, which Dell should achieve on a run rate basis in fiscal 2018. However, elevated NAND and DRAM prices due to supply shortages will be at least a near-term headwind. Infrastructure Solutions Group segment margins were down 60bps year-over-year in the first fiscal quarter ended Feb. 3, 2017 due to higher commodity prices, which Fitch expects to crimp margin expansion in fiscal 2018 due to challenges raising prices. As a result, Fitch now expects operating EBITDA at just over $10 billion for fiscal 2018 and more than $11 billion for fiscal 2019, versus prior expectations for operating EBITDA approaching $12 billion in fiscal 2019. Operating EBITDA margins expand slightly in fiscal 2018 but exceed 13% beyond the near term. Fitch believes Dell's liquidity was adequate as of Aug. 4, 2017, and consisted of: --$11.2 billion of cash, cash equivalents and short-term investments, the majority of which was offshore and $3.6 billion of which was attributable to VMware (prior to the senior notes issuance). --$3.1 billion of availability under the $3.2 billion RCF expiring 2021. Fitch's expectations for $4 billion of normalized FCF also supports liquidity, as does Dell's moderate to strong parent-subsidiary linkage with VMware, which provide contingent liquidity. Contact: Jason Pompeii Senior Director +1 312-368-3210 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60603 Kevin McNeil Director +1 646-582-4768 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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