Friday, 19 July 2019

US Leveraged Loan: Dell’s US$9.1bn LBO

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A clash of titans

In February 2013, lead arrangers Bank of America Merrill Lynch, RBC, Barclays, Credit Suisse and UBS signed a financing package backing the US$25bn buyout of computer maker Dell by founder and CEO Michael Dell and private equity firm Silver Lake Partners.

But what followed was far from straightforward. Activist investor Carl Icahn and Southeastern Asset Management entered the fray, triggering one of the most interesting takeover fights in years. Declining PC revenues and worries about Dell’s prospects meant the company’s bankers were faced with the scenario where their commitments would eventually turn into losses.

Having to sit on a US$9.1bn commitment for seven months wasn’t much fun for the banks involved, particularly as Michael Dell and Silver Lake, keen to maintain a share price consistent with their buying plans, kept putting forth negative expectations about Dell’s future.

“This fight is going on between Carl Icahn and Silver Lake and Michael Dell, where the company and the sponsor are talking down the credit. So they’re saying how terrible their company is. We have a lot of financing that we have to do at the same time,” said Marc Warm, co-head of US leveraged finance capital markets at Credit Suisse.

Icahn and Southeastern were loudly offering shareholders an alternative leveraged recapitalisation that included a competing financing package.

“Icahn could push higher, try to make people nervous, try to make people think our deal was going to be hung,” said AJ Murphy, co-head of global leveraged finance at Bank of America Merrill Lynch. “It was a very tricky dance. When the Icahn noise was at its peak, there were times when we thought our terms were out of the money.”

The closely watched bidding battle, which was highly visible in the media, pushed the launch of the deal beyond the summer – later than had been hoped. But on September 9, Icahn ended his effort to block Michael Dell’s proposal. The financing was launched two days later. As the loan hit investors’ in-boxes, the arrangers began a campaign to address concerns about Dell’s valuation.

Strong investor demand allowed Dell to cut the pricing on its covenant-lite loans – and increase their size – to cover a reduced first-lien bond and cancel an expensive second-lien bond. A euro-denominated loan was also added after reverse enquiry from European investors.

After several tweaks, the US$9.1bn financing included a US$2bn revolver; a US$1.5bn US Term Loan C that targeted CLOs; a US$4.66bn Term Loan B; and a €700m Term Loan B. There was also a US$1.5bn first-lien note, while an extra US$150m in balance-sheet cash was also added to supplement equity from Dell.

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