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Rating Action:

Moody's upgrades Dell's CFR to Ba1; outlook stable

07 Sep 2016

New York, September 07, 2016 -- Moody's Investors Service ("Moody's") upgraded Dell Inc.'s ("Dell") corporate family and probability of default ratings ("CFR" and "PDR", respectively) to Ba1 and Ba1-PD from Ba2 and Ba2-PD, respectively, following the close of Dell's acquisition of EMC Corporation ("EMC"). Moody's also upgraded Dell Inc.'s unsecured notes to Ba2 from Ba3. These actions conclude the review for upgrade initiated on October 12, 2015 following Dell's announcement that it signed a definitive agreement to acquire EMC for $24.05 per share in cash in addition to tracking stock linked to a portion of EMC's economic interest in the VMware, Inc. The rating outlook is stable.

In addition, Moody's changed the provisional (P)Baa3 ratings on the senior secured credit facilities (held at Dell International, a debt issuing subsidiary of Dell Inc., and EMC, as co-issuer) and first lien notes and (P)Ba2 rating on the unsecured notes, which were assigned in May and June 2016, to definitive Baa3 ratings and Ba2 ratings, respectively, in connection with Dell's purchase of EMC.

Both the secured and unsecured notes were issued at Diamond 1 Finance Corporation ("Diamond 1") and Diamond 2 Finance Corporation ("Diamond 2"). With the closing of the acquisition, Dell International and EMC, as co-issuers, assumed all of Diamond 1 and Diamond 2's obligations under these notes. In addition, the ratings of the credit facilities issued in connection with the Dell LBO in October 2013 will be withdrawn upon repayment.

RATINGS RATIONALE

The upgrade of the CFR reflects Moody's view that despite the significant increase in debt and initial leverage, Dell's overall credit profile will be enhanced with the additional scale of EMC, a merger that creates the largest private technology company in the world with projected annual revenues of more than $75 billion. Moody's believes that Dell and EMC's combined product portfolio of client, data center, and storage solutions (which includes VMware, EMC's 81% owned software virtualization subsidiary) will position Dell to compete effectively in a technology environment shifting to hybrid cloud computing platforms. While the personal computer industry will likely continue to see declining unit shipment volumes over the next several quarters, Moody's anticipates low single digit market revenue growth for Dell and EMC's server and storage businesses as enterprises continue to build private cloud capacity in the data center.

A key driver for the upgrade of the CFR to Ba1 is Michael Dell's commitment to rapidly de-lever, which Moody's expects will be driven by net proceeds of at least $8 billion from asset divestitures (with Dell already announcing sales of its Services business for over $3 billion and its software unit for an estimated purchase price of over $2 billion), substantial cost savings and synergies totaling $2.6 billion, and projected annual free cash flow nearing $5 billion in calendar year 2017. Similar to what transpired after the leveraged buyout of Dell in 2013, Moody's believes that the company will allocate a majority of its cash flow to debt repayment. Accordingly, Moody's expects that adjusted debt to EBITDA will decrease to 4x by the end of calendar year 2017 from about 6x at transaction close.

The Ba1 CFR also incorporates the considerable key man risk associated with Michael Dell's majority stake 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 industry, possible delays with the hardware refresh cycle over the next year, and the rapidly evolving technology landscape. Uncertainty over whether the strategic shift to higher margin enterprise solutions can be achieved organically is a rating constraint.

The stable outlook is based on Moody's expectation that Dell will preserve its solid liquidity profile while generating low single digit revenue growth from its enterprise solutions business with slightly declining to flat PC revenues through calendar year 2017. Moody's anticipates that most of the cost synergies will be achieved over the next year 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 beyond calendar year 2017 could also pressure the rating down.

Upgrades:

..Issuer: Dell Inc.

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

.... Corporate Family Rating, Upgraded to Ba1 from Ba2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba2 (LGD6) from Ba3 (LGD5)

Assignments:

..Issuer: Dell Inc.

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

..Issuer: Dell International LLC & EMC Corporation as Co-issuers

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

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

....Senior Unsecured Regular Bond/Debenture, Assigned Ba2 (LGD5)

Outlook Actions:

..Issuer: Dell Inc.

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

..Issuer: Dell International LLC

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

The principal methodology used in these ratings was Diversified Technology Rating Methodology published in December 2015. Please see the Ratings 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.

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

Lenny J. Ajzenman
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

No Related Data.
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