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Global Credit Research - 31 Jan 2013
New York, January 31, 2013 -- Bonds issued by certain US investment-grade technology companies
offer investors varying degrees of protection, Moody's Investors
Service says in a new report, with the covenants of Dell and Hewlett-Packard
(HP) among the weakest. Moody's reviewed the most recent
note issuance of seven companies that face some event risk as a result
of changes in their business models, with a focus on change of control
and limitation on liens covenants.
"The bonds issued by Dell and HP offered the least protection in
our sample," says Vice President -- Senior Credit Officer
Stephen Sohn in "Dell, HP Have Weak Covenant Protections Relative
to Investment-Grade Tech Peers." "Those companies
are both able to issue considerable amounts of secured debt, so
their existing bondholders face high subordination risk."
Dell bondholders are not protected by a change of control put option.
Since the company's limitations on liens apply mainly to property,
plant and equipment, nearly all of its assets would be available
for potential secured financing that would subordinate current noteholders,
Sohn says. Similarly, HP's debt indentures include
no change of control protection, and in terms of liens subordination,
the company's bondholders are subject to the same risk as Dell's.
In contrast, bonds issued by Xerox Corp., Computer
Sciences Corp. (CSC) and Lexmark International Inc. offered
the strongest protections in Moody's sample. Bonds issued
by the two other companies in the sample, Western Union and Pitney
Bowes, ranked in the middle for investor protections.
"Xerox, CSC and Lexmark offer change of control put options
for all five triggering events that Moody's considers 'standard'
protections in constructing the covenant quality assessments,"
says Alexander Dill, Vice President -- Head of Covenant Research.
And in terms of liens covenants, those of Xerox, CSC and Lexmark
apply broadly to all company assets, which protects investors from
subordination. Dell, HP, Pitney Bowes and Western Union,
on the other hand, use a "principal property" formulation,
which restricts their liens covenants to property, plant and equipment.
Moody's research subscribers can access this report at http://www.moodys.com/research/US-Technology-Industry-Dell-HP-Have-Weak-Covenants-Relative-to--PBC_149570.
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Stephen Sohn
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
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Alexander Dill
VP - Senior Credit Officer
Corporate Finance Group
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Moody's: Dell, HP covenant protections weak next to peers'
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