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Rating Action:

Moody's affirms Dell's Ba1 CFR; outlook stable

23 Aug 2019

New York, August 23, 2019 -- Moody's Investors Service ("Moody's") affirmed Dell Inc.'s Ba1 Corporate Family Rating (CFR) and Ba1-PD Probability of Default Rating following the announcement that VMware, Inc. plans to acquire Pivotal Software, Inc. and Carbon Black, Inc. for $4.8 billion, including approximately $2.8 billion in net cash consideration. The rating outlook is stable. VMware plans to finance the cash portion of the purchase price from a combination of cash on hand and proceeds from short-term borrowings. As part of the rating action, Moody's also affirmed the debt ratings at Dell International LLC and EMC Corporation. Dell Inc. is a wholly-owned indirect subsidiary of Dell Technologies Inc. ("Dell") and VMware is an indirect, unrestricted indirect subsidiary of Dell.

Affirmations:

..Issuer: Dell Inc.

.... Corporate Family Rating, Affirmed Ba1

.... Probability of Default Rating, Affirmed Ba1-PD

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD6)

..Issuer: Dell International LLC

....Senior Secured Bank Credit Facility, Affirmed Baa3 (LGD3)

....Senior Secured Regular Bond/Debenture, Affirmed Baa3 (LGD3)

..Issuer: Diamond 1 Finance Corporation

....Senior Secured 1st lien Notes, Affirmed Baa3 (LGD3)

....Senior Unsecured Notes, Affirmed Ba2 (LGD5)

..Issuer: EMC Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba2 (LGD6)

Unchanged:

..Issuer: Dell Inc.

.... Speculative Grade Liquidity Rating, SGL-1

Outlook Actions:

..Issuer: Dell Inc.

....Outlook, Remains Stable

..Issuer: Dell International LLC

....Outlook, Remains Stable

RATINGS RATIONALE

The proposed acquisitions by VMware will enhance VMware's cloud-based security and application development software portfolio and accelerate its revenue growth. While the acquisitions are credit negative for Dell given the erosion in cash position at VMware and the dilutive impact to EBITDA in the next 12 to 18 months following the close, Moody's expects VMware to repay the acquisition debt and replenish its cash balances during fiscal year ending in February 2021. Michael Dell and Dell together own common stock representing about 95% of the voting power of Pivotal common stock and will receive shares of VMware's Class B stock as part of the purchase consideration, which will raise their beneficial ownership of VMware by 0.34% to 81.09%.

Moody's analyst Raj Joshi said, "The affirmation of Dell's Ba1 CFR and the stable outlook reflect Moody's view that Dell has the capacity and remains committed to substantially reducing its "core debt" over the next 12 to 24 months." Moody's expects total debt to EBITDA (incorporating Moody's analytical adjustments and proportionate consolidation of VMware's debt and EBITDA) to decline to 4x in FYE '22, down from about mid-5x at fiscal year ended February 2019. In addition to the company's commitment to reducing "core debt" by $4.8 billion in FY '20, Moody's expects that Dell will continue to allocate the preponderance of its about $3.5 billion of annual free cash flow (excluding VMware's free cash flow and incorporating Moody's adjustments for growth in financing receivables) after FY '20 to reduce its debt consistent with management's goal of achieving an investment grade financial profile. Joshi said, "We believe that future deleveraging will increasingly depend upon debt reduction as extremely favorable conditions that supported above-trend revenue and EBITDA growth in FY '19, are expected to recede in the next 12 to 24 months." Dell's adjusted EBITDA grew 13% in FY '19, benefiting from a combination of extremely favorable macroeconomic conditions globally, steep declines in memory component prices and strong business execution. Moody's expects EBITDA growth to decelerate to the high single digits in FY '20 and mid-single digits in FY '21 as a result of the slowing global macroeconomic growth and stabilizing memory prices.

The Ba1 CFR is supported by Dell's significant scale as one of the largest vendors of Information Technology (IT) solutions with $91 billion in revenues and leading positions in the server, storage and personal computer categories, and through VMware, in the infrastructure software segment. However, many of Dell's core product segments are mature and demand for IT hardware products is highly correlated with changes in macroeconomic conditions. Moody's expects Dell to generate revenue growth in the low single digits though EBITDA growth should outpace revenue growth. Dell has very good liquidity comprising its strong cash balances ($5.4 billion excluding cash at unrestricted subsidiaries), a $4.5 billion revolving credit facility and Moody's expectations for free cash flow of over $3 billion over the next 12 months. Dell's Ba1 rating also incorporates the high event risk resulting from the majority ownership interest of affiliates of Michael Dell, and the equity interest in the company held by affiliates of Silver Lake Partners.

The stable outlook reflects our expectation that Dell will maintain strong liquidity and prioritize debt repayments such that total debt to EBITDA will decline toward 4x over the next 12 to 24 months.

Dell's rating could be upgraded if the company generates sustained annual revenue growth of at least mid-single digits, adjusted operating margins (as reported by the company) increase to the low double digits percentages, and total debt to EBITDA (including 81% of VMware debt and EBITDA, as well as Moody's adjustments for operating leases and finance operations) approaches the mid 2 times range. In addition, financial policies will need to be very conservative with the risk of a significant leveraging event considered remote. The ratings could be downgraded if Moody's expects that Dell's total debt to EBITDA (Moody's adjusted) will not decline to below 4.5x as a result of deterioration in profitability or the failure to repay debt with the preponderance of free cash flow.

The principal methodology used in these ratings was Diversified Technology published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Dell Technologies Inc. is a leading provider of personal computers, servers, enterprise storage, and related devices. Dell Technologies Inc. owns approximately 81% of VMware's outstanding common stock.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Raj Joshi
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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