Dell Likely To Be Cut To Junk-Bond Credit Rating After Buyout

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Dell Inc. (NASDAQ: DELL) is trading up only about 1% now that its formal buyout has surfaced. Now that Michael Dell is using private equity as an investor and using finance from the outside and repatriating cash from overseas, not everyone is positive on this deal.

We warned about shareholder suits or investigations announced by law firms because this was going to lock in forced long-term losses for many shareholders. Now we have some new concerns brought up by Standard & Poor's on Dell's corporate credit rating.

S&P placed Dell's "A-" rated corporate credit rating and its "A-1″ commercial paper ratings on CreditWatch with negative implications. In short, S&P is considering a downgrade of the corporate credit. This comes on the heels of seeing some Dow Jones news this morning showing that credit spreads widened out on Dell's longer-term corporate bonds. That report noted that prior debt holders may be subordinate to the new debt for this MBO financing.

Michael Dell may be getting to do this deal solely because interest rates are so low. Otherwise the borrowing costs are likely to be higher down the road. The problem is that S&P said that it expects to lower its ratings on Dell out of investment grade after reviewing the proposed capital structure, corporate financial policy, and strategic direction under the new ownership structure.

As this new borrowing will leverage Dell's good balance with a lot of new debt, S&P warned that the new credit rating is likely to be no more than "BB" and perhaps in the "B" range. In short, Dell's existing debt will likely be junk-rated debt. This sounds bad on the surface and in no way is it really good. The caveat we would bring up is that this would not be anywhere close to the first instance that this has come about where good credit is cut to junk-rating. That was very common back in the private equity boom from 2005 to 2008 when companies were acquired almost weekly with leveraged finance by private equity shops which hoped to flip the companies back on to the capital markets or to a higher bidder down the road.

Michael Dell's press release this morning indicated that the deal is not subject to any financing. For his sake he better hope that doesn't magically change.

Dell shares are up 1.2% at $13.43 against a 52-week trading range of $8.69 to $18.36.

Filed under: 24/7 Wall St. Wire, Analyst Calls, Bonds, Mergers & Acquisitions, Mergers and Buy Outs, PC Companies, Private Equity, Technology, Technology Companies Tagged: DELL, featured