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Fitch Affirms Dell's IDR at 'BB-'; Outlook Stable
[September 10, 2014]

Fitch Affirms Dell's IDR at 'BB-'; Outlook Stable


NEW YORK --(Business Wire)--

Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR) of Dell (News - Alert), Inc. (Dell) and its direct wholly-owned subsidiary, Dell International Inc. (Dell International) at 'BB-'. The Rating Outlook is Stable.

KEY RATINGS DRIVERS

Dell's ratings and Outlook reflect:

--Adequate financial flexibility supported by Dell's significant cash balance, the majority of which is overseas, a largely undrawn $2 billion asset-based revolving credit facility, partially offset by a significant and increased working capital deficit that could weigh on liquidity if revenue materially declines.

--Management remains committed to using FCF primarily for debt reduction. Dell's core credit metrics are essentially in-line with Fitch's base case forecast at the time of the leveraged buyout (LBO) and remain consistent with a 'BB-' rating.

Dell achieved Fitch's core leverage forecast since the close of the LBO on Oct. 29, 2013 through Aug. 1, 2014 primarily due to sustainable, but largely one-time working capital benefits, cost reduction actions and favorable conditions in the commercial PC market (expiration of Windows XP support).

--Credit metrics improved as expected, especially core (non-financing), excluding purchase price accounting adjustments (PPA), albeit partially funded with cash flow from working capital due to a material increase in days payable outstanding. Fitch estimates Dell's total core leverage excluding PPA was 3.4x as of Aug. 1, 2014 compared with 4.6x at Nov. 1, 2013.

--Significant scale, which provides procurement efficiencies for memory, hard disk drives and other components utilized across the hardware business, specifically PCs, servers and storage.

--Highly diversified revenue base by customer and geography (50% outside U.S.).

Ratings concerns center on:

--The vast majority of Dell's revenue continues to be largely transactional and derived from Client Solutions predominately in the commercial market (formerly End User Computing). Commercial PC demand has benefitted from Microsoft's (News - Alert) end of support for Windows XP in April 2014 but the commercial XP refresh is nearing completion, likely leading to a near-term moderation in commercial PC demand.

Positively, Dell's PC business has gained market share for six consecutive calendar quarters ended June 30, 2014, according to IDC (News - Alert). Dell's PC unit shipments increased 7% in the latest 12 months ended June 30, 2014 compared with an overall PC market decline of 4.9%.

Dell's unit market share gains reflect improved execution, a predominately commercial customer mix with less exposure to weak consumer markets and vendor consolidation as the top five vendors represented 66% of global PC shipments n the quarter ended June 30, 2014 compared with slightly less than 60% in the year-ago period.



Consumer PC demand remains weak, and Fitch believes a sustainable improvement in the global PC market is unlikely without an unexpected resurgence in consumer interest, given consumers account for approximately 60% of total worldwide PC shipments, according to Intel (News - Alert).

--Dell's higher margin Enterprise Solutions Group (ESG), a key component of Dell's transformation to an end-to-end provider of IT solutions, has materially lagged Fitch's expectations.


--Aggressive industry pricing environment for PCs and servers, particularly for the hyperscale server market.

--Limited financial flexibility to make significant acquisitions to fill product and service gaps that may arise as technologies evolve without adversely affecting the ratings.

RATINGS SENSITIVITIES

Negative rating actions could occur if: i) pre-dividend FCF margin falls below 2% for a sustained period, ii) FFO adjusted leverage exceeds 6x for a sustained period, iii) PC revenue declines significantly, materially pressuring liquidity, profitability and FCF generation, or iv) revenue growth is negative for an extended duration, resulting in significant liquidity pressures. Dell's negative cash conversion cycle generates significant cash flow usage from working capital in a declining revenue environment.

Positive rating actions could occur if: i) Revenue mix materially shifts toward enterprise solutions, resulting in significant operating profit margin expansion, reduced reliance on the extremely competitive PC industry and lower financial performance volatility due to a greater percentage of recurring revenue from long-term contracts, such as IT services or software, or ii) FCF is primarily used for debt reduction rather than acquisitions, resulting in FFO adjusted leverage below 4x for a sustained period.

Fitch has affirmed Dell's ratings as follows:

Dell

--Issuer Default Rating (IDR) at 'BB-'; and

--Senior unsecured notes and debentures at 'B+'.

Dell International

--Issuer Default Rating (IDR) at 'BB-';

--Senior secured revolving credit facility (RCF) at 'BB+';

--Senior secured loans at 'BB+'; and

--Senior secured notes at 'BB+';

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=869634

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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