Junk science
Junk-rated Dell sold a US$20bn investment-grade M&A bond. It was the fourth-largest corporate bond ever – but just one piece of a highly creative US$38bn fundraising effort that is IFR’s US Financing Package of the Year.
Working out how to finance Dell’s mega-merger was always going to take some time and preparation. But Dell’s US$60bn pursuit of cloud computing company EMC was especially tricky.
Junk-rated Dell, already groaning under some outstanding debt, needed a package that would raise funds without putting extra pressure on its balance sheet.
And the bond markets did not seem to be deep enough to support the US$38bn financing – especially given that the junk-bond market was then in the throes of a vicious sell-off.
Dell instead put together a banking team to look at other options, such as raising the debt through preferred stock issuance or a high-yield bond along with bank loans.
But before it could press the button on what in retrospect would have been an overly expensive decision, Credit Suisse stepped in with a better idea.
The bank suggested a financing similar to what Charter Communications had pursued a year earlier – that is, it would structure a secured trade for the junk-rated issuer that would carry investment-grade ratings.
The momentum generated by that trade would then help execute the other pieces of the financing – and the strategy worked like a charm.
In May, Dell raised US$20bn through a six-tranche high-grade bond issue tailor-made to enable access to a wider pool of liquidity and structured to please investors.
The offering was secured by various forms of collateral, including equity interest in Dell and its subsidiaries as well as property and inter-company notes.
While keeping down funding costs, the bond also included step-up coupon language that addressed concerns about leverage leading to any downgrades. Coupons would step-up by 25bp per notch on a downgrade to below investment grade by S&P and Moody’s.
The result? Dell was able to print the fourth-largest US dollar corporate bond ever, and one that attracted more than US$88bn of orders.
The deal was also the largest investment-grade technology bond and had the fourth-largest order book for a high-grade bond issuer.
The bond was co-issued by two finance companies – Diamond 1 Finance Corporate and Diamond 2 Finance Corporate – which were to be assumed by Dell International and EMC Corporation.
It was shown with huge new-issue premiums of up to 100bp at the price talk stage, but those levels were heavily scaled back as the deal moved along.
Final pricing was about 50bp–75bp tighter than IPTs and offered roughly 10bp–35bp in concessions across the three, five, seven, 10, 20 and 30-year tranches.
“It became possible to execute such a financing partly because of the company’s solid track record with bond investors,” said a person familiar with the financing.
“When Dell was taken private, it had promised investors that it would de-lever quickly, which it did by paying down a significant amount of gross debt before the EMC acquisition.”
About face
By any measure it was a stunning result for a company that many bankers had doubted could even get a US$10bn junk bond over the line just a few months before.
Dell’s solid record of meeting its commitments – and a new pledge to get back to investment grade within 24 months – had clearly helped investors overcome any lingering doubts.
And the guarantees securing the bond would fall away if the company got an investment-grade rating.
“By allowing the investment-grade bond market to have such a huge piece of the underwriting, it gave us confidence to underwrite the deal on an all-debt basis without issuing the US$5bn plus of preferred stock,” said Jeff Cohen, head of US loan capital markets at Credit Suisse.
Credit Suisse and JP Morgan were global financing coordinators, and both served as joint active bookrunners with Bank of America Merrill Lynch, Barclays, Citigroup and Goldman Sachs.
All the banks concerned had reason to be pleased with the bond, which did indeed go on as planned to help spur the remainder of the financing package.
Dell reduced the size of its Term Loan B to US$5bn from the originally planned US$8bn; it cut pricing to 325bp over Libor from the 350bp–375bp range with a 0.75% floor.
And it tightened the discount to 99.5 from 99. The deal included a 25bp step-down in pricing when first-lien net leverage reached one time.
Dell then upsized the Term Loan A to US$9.43bn from US$7bn. This consisted of a US$3.7bn TLA-1 due at the end of 2018, a US$3.93bn five-year TLA-2 and a US$1.8bn TLA-3 that matures on December 31 2018.
Dell also said that it would apply any proceeds from asset disposals to reducing the borrowings under the TLA-1 and TLA-3.
Any residual interest was to be mopped up in the final leg of the financing: an unsecured high-yield bond that was the riskiest and lowest-rated portion of the financing.
The US$3.25bn Double B rated bond was evenly split between a five-year non-call two tranche that was priced at a yield of 5.875% and an eight-year non-call three piece that cleared at 7.125%.
Investor appetite allowed the company to tighten pricing on both tranches by 37.5bp from price talk of 6.25% and 7.50%.
Savings the day
In all, said a person familiar with the deal, Dell would save more than US$250m annually compared with indicative pricing at signing (more than US$1.25bn cheaper than the caps).
“This financing tested the capacity of the market,” the person said. “It allowed Dell to eliminate the need for preferred equity.”
But the high-grade bond “enabled them to then roll into the other parts of the capital structure … for an overall weighted average cost of debt that was under 4.5%”.
At the end of the day, investors were satisfied, while Dell had created the largest privately held technology company in the world, with projected annual revenues of more than US$74bn.
In September, Moody’s upgraded Dell’s corporate ratings to Ba1 from Ba2 and said the key driver was Michael Dell’s commitment to rapidly de-lever.
Moody’s expects delevering will be driven by proceeds of at least US$8bn from asset divestitures, substantial cost savings and synergies totalling US$2.6bn, and projected annual free cashflow nearing US$5bn in 2017.
The new company was named Dell Technologies – and it has been all systems go.
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