Dell’s LBO May Lower Bondholder Priority, Moody’s Analyst Says

Debt issued by Dell Inc. to fund its $24.4 billion leveraged buyout will probably take priority over the company’s existing bonds in a bankruptcy or restructuring, according to Moody’s Investors Service.

Dell’s bonds only protect against adding liens for newly issued debt on about 2 percent of the company’s $45.4 billion of total assets, according to Matthew Musicaro, a New York-based credit analyst at Moody’s. Dell may issue a “significant amount” of secured debt that would structurally subordinate existing bondholders, he said.

Dell’s $600 million of 5.875 percent unsecured notes due June 2019 traded at 99.75 cents on the dollar at 10:06 a.m. in New York, falling 18.8 cents since Jan. 11, before the buyout talks, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

David Frink, a spokesman at Round Rock, Texas-based Dell, didn’t respond to a request for comment on potential bondholder subordination.

The notes also lack change-of-control provisions, which allow bondholders to force repayment of the debt at a specified price if a company is sold, Alexander Diaz-Matos, an analyst at independent credit research firm Covenant Review LLC, said in a telephone interview. These types of protections didn’t become standard until investors lost money in large LBOs, he said.

“Investors in the market thought that Dell was too big for an LBO and had a relaxed attitude when they were selling these bonds in the last couple years without change-of-control protection,” Diaz-Matos said. “Portfolio managers do have a fiduciary duty to figure out LBO risk again so their investors don’t lose money on LBOs like they did in 2005-2007.”

Moody’s lowered Dell’s senior unsecured rating to Baa1 from A2 yesterday and put the grade under review for downgrade, saying it would “likely result in a multi-notch downgrade of the long-term rating to below investment grade.”

Fitch Ratings lowered its rating on Dell to BB+ from A yesterday and Standard & Poor’s put its A- grade on review with negative implications. The computer maker has $5.9 billion in bonds outstanding, according to data compiled by Bloomberg.

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