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Rating Action:

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

14 Aug 2017

New York, August 14, 2017 -- Moody's Investors Service ("Moody's") affirmed Dell Inc.'s ("Dell") corporate family and probability of default ratings ("CFR" and "PDR", respectively) at Ba1 and Ba1-PD, respectively, following VMware, Inc.'s proposed notes issuance. Moody's also affirmed all of the debt ratings at Dell, Dell International LLC, and EMC Corporation. The rating outlook is stable.

RATINGS RATIONALE

The Ba1 CFR reflects Moody's view that despite the underperformance of the Dell business compared to original expectations at the closing of the merger in September 2016, Dell remains committed to repaying a significant amount of debt through the end of fiscal year 2019, at which time gross leverage will decrease to about 4x (including 82% of VMware EBITDA and debt). Moody's had originally expected adjusted debt to EBITDA to decrease to 4x by the end of fiscal year 2018, so Moody's anticipates that the de-leveraging timetable has essentially been delayed by one year. While debt reduction has remained largely on track to date (adjusted for the possibility of additional asset sales and higher than expected cash balances, set aside to repay maturing debt in fiscal year 2019), profitability has been hampered by 1) higher component costs (especially DRAM and SSD pricing), 2) relatively weak performance of the EMC storage business, which is down about mid-single digits on a year over year basis since the merger, 3) slower than expected realization of cost synergies given re-investments (e.g., global sales channel expansion and R&D investments in emerging products) into the business to support revenue growth and share gains in the PC and server markets. Moody's expects operating performance to stabilize as Dell adjusts pricing to partially mitigate higher component costs, further integrates its combined Dell EMC sales force, introduces new product lines, and achieves net cost synergies of at least $2 billion (original target at the time of the merger) by the end of fiscal year 2019.

A key underpinning for the Ba1 rating remains Michael Dell's commitment to repay debt. Moody's expects that Dell will pay down total debt of $10 billion in fiscal years 2018 and 2019 through a combination of cash flow generation and the use of cash on its balance sheet. So long as the commitment and ability to repay debt remains intact, this will afford Dell some time to restore profit growth in a challenging hardware environment amidst a sizable integration effort. Even assuming only a modest rebound in operating performance, Moody's expects Dell to generate substantial operating cash flow (excluding VMware) in the next fiscal year (of more than $5.5 billion), supported by flat to low single digit revenue growth.

Dell's overall credit profile is supported by significant size and scale as the largest privately-controlled technology company in the world with projected annual revenues of more than $75 billion. While the personal computer (PC) industry will likely continue to see declining shipment volumes over the next several quarters, Moody's expects Dell to continue to gain market share as one of the 3 leading PC makers. Moody's anticipates modest server growth with stabilization of EMC's storage businesses as enterprises continue to build private cloud capacity in the data center.

There is also significant key man risk associated with Michael Dell's majority stake, the possibility of increasing ownership in VMware, elevated share buybacks of the tracking stock, and the long term potential exit of Silver Lake, which may lead to another levering event. Potential event risk could also arise if Dell is unable to achieve sustained revenue growth in light of the challenged PC and storage industry and rapidly evolving technology landscape. Uncertainty over whether the strategic shift to higher margin enterprise solutions can be achieved organically will remain a rating constraint.

The stable outlook is based on Moody's expectation that Dell will preserve its solid liquidity profile while generating flat to low single digit revenue growth while improving profit margins through pricing adjustments, stabilization of the enterprise storage business, and cost savings. Moody's expects that most of the targeted cost synergies of $2 billion will be achieved over the next 12 to 18 months with free cash flow to be used primarily for debt repayment.

Moody's could upgrade Dell's ratings if the company were to show sustained annual revenue growth of at least mid-single digits, high single digit adjusted operating margins, and gross debt to EBITDA in the mid 2 times range. In addition, financial policies will need to be very conservative with the risk of a significant levering event considered remote. The rating could be lowered with sustained erosion of market share, reported adjusted operating profit margins lower than 3%, or revenue declines from a contraction of the PC, server, and storage markets. Also, any indications of a change in Dell's financial policies, such that gross debt to EBITDA remains above 4.5 times by the end of fiscal year 2019 could also pressure the rating down.

Affirmations:

..Issuer: Dell Inc.

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

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

.... Corporate Family Rating, Affirmed Ba1

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

..Issuer: Dell International LLC

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

..Issuer: Diamond 1 Finance Corporation (debts assumed by: Dell International LLC & EMC Corporation as Co-issuers)

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

....Senior Unsecured Regular Bond/Debentures, Affirmed Ba2 (LGD5)

..Issuer: EMC Corporation

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

Outlook Actions:

..Issuer: Dell Inc.

....Outlook, Remains Stable

..Issuer: Dell International LLC

....Outlook, Remains Stable

The principal methodology used in these ratings was Diversified Technology Rating Methodology published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Dell Inc. is one of the world's leading providers of personal computers, servers, enterprise storage, and related devices.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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. The below contact information is provided for information purposes only.

Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

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.

Stephen Sohn
Senior Vice President
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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