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Rating Action:

Moody's concludes review of VMware's senior unsecured notes with downgrade to Baa3; outlook stable

29 Oct 2021

New York, October 29, 2021 -- Moody's Investors Service ("Moody's") downgraded the ratings of VMware, Inc.'s ("VMware") senior unsecured notes that were rated Baa2 and were under review for downgrade, to Baa3. Moody's also affirmed the Baa3 ratings for the senior notes that were issued in August 2021 and have a Special Mandatory Redemption ("SMR") requirement. The outlook for ratings is stable. These rating actions conclude the review of VMware's ratings that was initiated on April 15, 2021. On November 1, 2021, Dell Technologies Inc. expects to complete the distribution of its approximately 81% ownership of VMware to Dell shareholders and VMware will concurrently issue a special cash dividend of $11.5 billion to its shareholders as part of the spin-off.

Affirmations:

..Issuer: VMware, Inc.

....Senior Unsecured Regular Bond/Debenture (with SMR requirement), Affirmed Baa3

Downgrades:

..Issuer: VMware, Inc.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa3 from Baa2

Outlook Actions:

..Issuer: VMware, Inc.

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

The downgrade of the senior unsecured rating (without SMR requirement) to Baa3 reflects the significant deterioration in VMware's credit profile after the special dividend. The Baa3 rating and stable ratings outlook reflect Moody's expectations that VMware's total debt to EBITDA (Moody's adjusted) will decline from about 5x at the close of the spin-off transaction, to 3.5x or lower, by fiscal year ending February 2024. This incorporates VMware's commitment to an investment grade rating and Moody's expectation that VMware will primarily direct its $3.3 billion or more in annual free cash flow in FY '23 and FY '24 toward debt repayment to achieve anticipated deleveraging. Moody's estimates that after giving effect to incremental $4 billion of term loan borrowings and the special dividend, VMware will have strong liquidity with about $5 billion of cash and an undrawn $1.5 billion revolving credit facility. The company's liquidity and free cash flow provide flexibility for anticipated debt reduction, moderate-sized acquisitions and opportunistic share repurchases under VMware's $2 billion of share buyback authorization that expires at FYE '24.

The Baa3 rating additionally reflects VMware's large installed base and a broad portfolio of infrastructure software technologies. Moody's expects VMware's offerings that enable its customers to modernize applications and Information Technology (IT) infrastructure and manage IT assets in on-premise and public cloud environments will support revenue growth in the high single digits over the next 2 to 3 years. VMware has strong profitability and high revenue-to-free cash flow conversion.

As VMware accelerates its transition from perpetual licenses to subscription agreements, the shift toward ratable revenues and cash flow will dampen reported revenue, profitability and operating cash flow growth. Over time, we expect the transition will strengthen VMware's business profile with the potential for higher lifetime revenues from the installed base and lower revenue volatility. Management has targeted to more than double its annual recurring revenues from subscription and Software as a Service (SaaS) between FY '22 and FY '25. The company's growing proportion of recurring revenues under software maintenance and subscription and SaaS agreements, the strong growth in its subscription and SaaS revenues, and the $11.3 billion of Remaining Performance Obligations provide high cash flow visibility over the next 12 to 18 months. These factors balance VMware's high business risks from intense competition across its product lines, the high proportion of its revenues that are derived from the mature server virtualization software segment as well as the mature on-premise traditional data center category, and rapidly evolving infrastructure technologies.

Governance considerations, specifically VMware's sharp increases in debt since FY '18 primarily to fund distributions to Dell, negatively influenced the ratings. The spin-off transaction is not expected to change the composition of VMware's Board of Directors. Affiliates of Michael Dell and Silver Lake Partners will collectively own over 50% of the common stock of VMware and Moody's believes they will continue to have an outsized influence in the key strategic and financial decisions of VMware. However, new shareholder agreements will limit Mr. Dell and Silver Lake Partners from taking actions that have the effect of controlling or changing the Board or management of VMware, or causing any material change in the capitalization, share repurchase practices, capital allocation practices or dividend policy of VMware.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade VMware's ratings if the company generates revenue and operating profit growth in the high single digits and it commits to a more conservative financial profile such that Moody's expects total debt to EBITDA (Moody's adjusted) will be sustained near 3x and free cash flow will exceed 25% of total adjusted debt. Conversely, the ratings could be downgraded if operating profit growth falls below 5%, or execution challenges or slower than anticipated debt repayments cause total debt to EBITDA (Moody's adjusted) to remain above 4x.

VMware, Inc. is a leading provider of infrastructure software to government and enterprise customers. Dell Technologies Inc. indirectly owns approximately 81% common equity interest in VMware.

The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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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CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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