Debt Markets Can Finance Potential Buyout of Dell, Barclays Says

Debt markets can support the $15 billion of loans and bonds needed to back a potential buyout of Dell Inc., according to Barclays Plc.

The capacity of the loan market to support larger leveraged buyouts is increasing, with almost $100 billion of the debt being used to fund mergers and acquisitions last year, the bank said today in a research report. The level is comparable with 2005, when the buyout boom was beginning, according to the report.

Credit markets can finance large deals due to the return of collateralized loan obligations, which fueled the rise of LBOs in 2005-2007, according to Barclays. Since the 2008 financial crisis, the debt markets have shown an ability to provide about $10 billion of funding, including $5 billion to $7 billion of bonds and $3 billion to $4 billion of loans, the bank said.

“While the rise in average deal size is a positive for strategic activity, the primary issue for Dell, and for other potential LBO candidates, is the market’s maximum capacity to absorb a large loan offering from a single issuer,” credit strategists led by Bradley Rogoff wrote in the report. “Today’s market is sufficiently pliable to absorb Dell and perhaps a small number of other similarly sized deals this year.”

A group including Michael Dell and private-equity firm Silver Lake Management LLC is in talks with banks to purchase the Round Rock, Texas-based company in a leveraged buyout, people with knowledge of the matter said this week.

Technology Deals

The takeover, based on market value, could be the largest buyout of a technology company since 2007, when KKR & Co. bought First Data Corp. for more than $25 billion, according to data compiled by Bloomberg. Dell, the third-largest maker of personal computers, has a market capitalization of about $22.5 billion, according to data compiled by Bloomberg.

The return of big LBOs, last seen before the 2008 financial crisis, is delayed in part by the reluctance of private-equity firms to invest large sums in deals, Barclays said in the research report.

Banks may be hindered from making sizable lending commitments because of increased focus on improving their balance sheets due to more regulations, according to the report.

“We still expect the more cautious macro environment and changing regulatory landscape to prevent a ramp-up from being as steep this time around,” the Barclays strategists wrote.

Banks arranged $637 billion of U.S. leveraged loans last year, compared with a record $892 billion in 2007, Bloomberg data show.

CLO issuance also peaked in 2007, pooling about $105 billion to invest in junk-grade loans, according to Wells Fargo & Co., which estimates that as much as $80 billion could be raised this year. That would surpass the $55 billion of new CLOs in 2012, which topped the bank’s original forecast for just $12 billion in 2012.

The loan funds are a type of collateralized debt obligation that pool high-yield loans and slice them into securities of varying risk and returns. Leveraged-loans are a form of junk debt rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

Before it's here, it's on the Bloomberg Terminal.