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Rating Action:

Moody's lowers Dell's LT rating to Baa1, short term to P-2; ratings under review for downgrade

Global Credit Research - 05 Feb 2013

New York, February 05, 2013 -- Moody's Investors Service lowered Dell Inc.'s (Dell) senior unsecured rating to Baa1 from A2 and short term rating to Prime-2 from Prime-1. Moody's also placed all ratings under review for downgrade following the announcement of a definitive agreement with Michael Dell and Silver Lake to acquire Dell in a leveraged buyout (LBO) with the equity valued at approximately $24.4 billion.

Moody's expects that conclusion of the review will likely result in a multi-notch rating downgrade of the long term rating to below investment grade given the proposed transaction's planned use of debt and Dell's continuing business challenges. To the extent that any of the outstanding rated bonds are redeemed, Moody's will withdraw the ratings on those bonds.

RATINGS RATIONALE

The Baa1 long term rating reflects our view that "Dell's profile has weakened with a more aggressive financial philosophy, at the same time as Dell struggles to transform its business model away from lower end hardware and commoditized PCs to potentially more profitable data center and enterprise solutions," said Moody's senior credit officer, Stephen Sohn.

The now lowered Baa1 rating also considers that Dell's strategic transition to an enterprise-centric model is taking longer than we had anticipated. This will likely require additional investments (e.g., R&D and M&A activity) and perhaps a restructuring of the personal computer (PC) business that could reduce cash flow and deplete what historically has been excellent liquidity (e.g., $14.2 billion of cash and investments as of November 2, 2012; over $3 billion of annual adjusted free cash flow). Moreover, this transition to a higher-end enterprise focus may need to be accelerated because of the sharp decline in the PC business.

Dell's transitional strategy has been slowed by the secular decline of PCs, with PC sales still accounting for nearly half of revenues. Moody's expects that Dell's PC revenues will continue to erode in 2013 with potential revenue declines for the PC business of double digits. For 2013, Moody's expects worldwide, industry-wide PC revenues to fall in the high single digits, with Dell trailing the pack of its primary competitors (e.g., Hewlett Packard, Lenovo, Acer, and ASUS).

With take-private discussions having occurred for a lengthy period (since August 2012), Dell has established a disposition towards more shareholder friendly actions. The planned LBO sets the precedent for more aggressive actions, regardless of whether the transaction closes. In the event the LBO is aborted, we believe such an outcome could pressure Dell's financial performance and weaken its competitive positioning given strategic and execution uncertainties.

Moody's review will focus on Dell's ability to execute its corporate strategy as a private company, with its new capital structure and liquidity profile. Moody's will assess Dell's ability to complete its transition to an enterprise model, which we believe will entail further investment of acquisitions and development. This activity would be constrained with the higher debt levels anticipated. The review will also consider management's plans and investment requirements to support the declining PC business, as well as the potential impact this LBO could have on customers, suppliers, and employees.

In addition, Moody's will also focus on corporate governance between Michael Dell, as the new controlling shareholder, and Silver Lake. An assessment of how Dell's new owners will balance shareholder interests with those of creditors will be a key part of the review. Moody's will also review the impact of the transaction on Dell Financial Services (DFS), including future funding requirements and what role DFS will play going forward.

Moody's notes that Dell's revolvers ($2 billion expiring April 2015 and $1 billion expiring April 2013), which backstop the commercial paper (CP) program with same day access, have a change of control covenant that can terminate the facility upon closing of the transaction. Moody's review will also look at Dell's plans to pay down its outstanding CP balances (last reported over $1.6 billion of commercial paper as of November 2, 2012).

Ratings lowered and placed under review for downgrade:

Senior unsecured rating to Baa1 from A2

Short term rating to Prime-2 from Prime-1

All ratings placed under review for downgrade

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

The principal methodology used in rating Dell Inc was the Global Technology Hardware Industry Methodology published in September 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

Robert P Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's lowers Dell's LT rating to Baa1, short term to P-2; ratings under review for downgrade
No Related Data.

 

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