Dell's Big Merger Ambitions Headed for Debt-Market Reality Check

  • Junk-bond investors wary after worst quarter in four years
  • Idea of $40 billion financing will put Wall Street to the test

Dell Inc. is trying to create a computing behemoth just as cracks are appearing in the debt markets that it would need to finance the deal.

The personal-computer maker is talking to banks about raising at least $40 billion to finance the purchase of EMC Corp., as the two companies battle flagging demand, according to people with knowledge of the matter. That could be tricky for junk-rated Dell because investors who gorged on $4 trillion of high-yield debt in the past five years are becoming increasingly wary.

"The idea of $40 billion in financing will put Wall Street’s creativity to the test," said Margie Patel, a fixed-income money manager for Wells Capital Management in Boston, which oversees $351 billion.

Debt markets are showing strains amid concerns that global growth is slowing just as the Federal Reserve is preparing to draw the curtains on its easy-money policies. At least seven borrowers were forced to pull debt deals in the past week.

‘Oh no’

A Dell-EMC merger may push total debt to about 5 times a measure of its earnings, which would put it more in line with a single-B rated company, according to a Bloomberg Intelligence report. That compares with the double-B rating that Dell commands and single-A for EMC, the larger of the two companies.

"There’s a collective ‘oh no, here we go again’ in the market, given the potential size, when we’ve already seen a ton of these huge deals this year,"  said Jack Flaherty, a money manager in New York at GAM Holdings AG. "They will have to do some work to get it done."

EMC Corp. bonds have plummeted amid concern that new debt raised to fund any deal could hurt existing bondholders. The company’s $1 billion of 3.375 percent notes maturing in June of 2023 tumbled about 9 cents in the past two days to 89.7 cents on the dollar at 1:51 p.m. Friday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Even if Dell and EMC agree to a merger in the coming days, the combined company may not need to tap debt investors for some time.

David Frink, a spokesman for Round Rock, Texas-based Dell, declined to comment.

The high-yield market, which just recorded its worst quarter in four years, has shown an aversion to risk as trouble in the pharmaceuticals industry, the downgrade of Sprint Corp. and the Volkswagen emissions scandal unnerved investors. Even in Europe, Goldman Sachs Group Inc. is telling companies that now isn’t the right time to sell junk bonds because there’s "a lot of risk in the world," according to Denis Coleman, the bank’s head of credit finance for Europe, the Middle East and Africa.

Selective investors

Only one high-yield bond deal has priced in the past two weeks, and those unable to wait have tried and failed as rattled investors tread with caution. Canadian organic food company SunOpta Inc. and machine-parts maker NN Inc. of Johnson City, Tennessee, may be forced to lean on their banks to provide backup financing after failing to muster enough investor interest in their debt offerings.

“If credits have any sort of hair on them, there might not be a price to clear the market in this environment,” said Peter Toal, the head of leveraged finance syndicate at Barclays Plc. "Investors are being very selective in terms of what they want to buy."

He said while it’s not unusual that borrowers who come to market after a bout of volatility are forced to pay large concessions to lure lenders, not many issuers are willing to be the test case.

Creditors are increasingly focused on "the outlook for new-issuance markets” and the extent to which “potential downside shocks trigger the closure –- temporarily or more structurally -– of companies’ access to capital markets," Matthew Mish, a senior credit strategist at UBS Group AG in New York, wrote in a Oct. 7 report.

Scotts Miracle-Gro, a maker of garden products, sold $400 million of notes Wednesday, ending the seven-day drought in junk-debt sales, according to data compiled by Bloomberg. 

Investors’ reluctance to commit money to new deals has spilled over to the leveraged-loan market as well, where at least five deals have been pulled in the past week.

"The high-yield market is still very focused on macro events -- global growth, China, price of oil," Toal said. “There have been idiosyncratic and credit-specific events that have hurt specific names. Investors are asking themselves ‘what’s the next shoe to drop?’"

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