Thu 10/28/2021 13:43 PM
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Relevant Items:
Dell Technologies Covenants Tear Sheet, Debt Document Overviews
Dell Technologies Debt Documents

On April 14, Dell announced plans to spin off one of its three business units, VMware Inc., of which it has 81% equity ownership, and form two standalone public companies. Under the transaction’s terms, VMware will distribute a cash dividend of $11.5 billion to $12 billion to all shareholders, and the two companies will enter into a cooperation agreement. Furthermore, VMware will continue to provide its customers with financing using Dell Financial Services. Dell further announced on Oct. 19 that the distribution will occur on Nov. 1. Though this transaction will minimize Dell’s debt profile, very little will change with respect to Dell’s capacity to incur debt and liens and make restricted payments or investments.

For convenience, Dell’s debt can be grouped into four classes: secured debt, unsecured debt, unrestricted and nonrecourse debt, and other debt. The secured debt includes a credit facility consisting of a $4.5 billion revolver, $4.9 billion term loan A and $3.1 billion term loan B, as well as $18.5 billion of senior notes among 10 series. The credit facility contains a full covenant package, but the senior secured notes contain investment-grade terms. The unsecured debt consists of one series of high yield-style notes ($1.6 billion), three series of legacy Dell notes predating Dell’s going-private transaction in 2013 ($952 million) and one series of legacy EMC notes predating Dell’s acquisition of EMC in 2016 ($1 billion). The unrestricted and nonrecourse debt includes VMware bank and capital market debt expected to total $16.3 billion by Nov 1 and Dell Financial Services’ nonrecourse debt of $9.6 billion. Finally, there is $392 million remaining in other debt after the company recently paid down its $1 billion margin facility loan.

The senior secured credit facility and 7.125% senior unsecured notes due 2024 share a similar guarantor package with the exception of the notes enjoying a guarantee from Dell Technologies Inc., which the credit facilities lack. Though the credit facilities do not have the benefit of the public company holdco’s guarantee, they do have the benefit a first lien on certain tangible and intangible assets of the borrower and its guarantors, as well as a first priority pledge on the customary package of stock of the borrowers and certain subsidiaries.

Both the credit facility and the 7.125% senior unsecured notes due 2024 also contain typical high-yield covenant packages and the concept of restricted versus unrestricted subsidiaries. The covenants, including the various restrictions on the incurrence of debt, apply to the restricted subsidiaries but not the unrestricted subsidiaries. Furthermore, the calculation of consolidated EBITDA for the purposes of the respective debt excludes EBITDA attributable to unrestricted subsidiaries. VMware is an unrestricted subsidiary, and as a result it is not restricted from incurring additional debt, nor is its debt or EBITDA included in the various ratio calculations. Thus, the spinoff transaction will have very little effect on Dell from a covenant perspective.

The transaction will improve Dell’s overall credit profile, however, and the company has stated its goal of achieving an investment-grade rating from all three ratings agencies by paying down or shedding debt and reaching a core debt ratio of 1.5x. As discussed below, the covenants do permit Dell to incur a substantial amount of additional debt should the company choose to reverse the current trend of paying down debt. Subsequent to the most recent fiscal quarter end of July 30, Dell prepaid in full the $1 billion margin loan facility, and VMware issued $6 billion of unsecured senior notes and entered into a new revolver that will replace the old revolver.

The company’s capital structure as of July 30 is as follows, pro forma for the subsequent credit-related activities discussed above:


Covenant Conclusions


  • Liquidity and financial covenant - Pro forma for the use of cash to prepay the margin loan facility and excluding VMware’s cash and revolver, liquidity as of July 30 was $9.3 billion. This includes estimated cash on hand of $4.8 billion and full revolver capacity of $4.5 billion. The credit facility contains a 5.50x net first lien leverage ratio, tested quarterly for the benefit of the revolving and term loan A lenders only. We estimate the pro forma net first lien leverage ratio to be 1.55x. In theory, the company has $50.9 billion of breathing room for first lien debt under the financial covenant, but the actual amount of additional debt that can be incurred is further circumscribed by the debt covenant.

  • Debt and liens - Despite the pro forma $28.7 billion in non-VMware and nonrecourse debt outstanding as of July 30, there was significant capacity for the company to incur new debt using the generous baskets of both the credit facility and the 7.125% unsecured notes due 2024. The credit facility contains the more restrictive package of the two, and its incremental debt covenant permits up to 100% of EBITDA (or $10 billion, whichever is greater) plus additional amounts subject to a 3.25x net first lien leverage ratio. We estimate this ratio to be 1.55x as of July 30, allowing a substantial amount of additional debt.

    The debt covenant includes a number of other generous baskets such as the general debt basket and capital expenditures basket. The ratio debt carve-out and the assumed acquisition debt and acquisition debt carve-out contain “no worse than” formulations for the fixed charge coverage ratio and net leverage ratio tests which can be used to access either basket. Although there is a separate standalone carve-out for nonguarantor restricted subsidiaries, there are also sublimits in other carve-outs that restrict the amount of debt such subsidiaries can incur using such baskets.

    We estimate that Dell can incur $62 billion in additional debt, of which $60 billion can be secured and at least $2.9 billion can be structurally senior.

  • Restricted payments, investments and prepayments - Both the credit facility and the 7.125% unsecured notes due 2024 contain covenants limiting restricted payments, investments and prepayment of subordinated debt. Among the various carve-outs, however, is a leverage-based basket tied to the net leverage ratio. Under both pieces of debt, Dell can make restricted payments as long as the net leverage ratio is less than 3.75x, and it can make investments as long as such ratio is less than 4.5x. Under the credit facility, Dell can also prepay payment-subordinated debt subject to a 3.75x net leverage ratio.

    We estimate the ratio to be 1.83x pro forma as of July 30, which gives Dell access to these baskets and the ability to make unlimited pro forma restricted payments and investments. This includes the spinoff of VMware, which is subject to the restricted payments covenant. The unsecured notes due 2024 do not permit prepayment of payment-subordinated debt except with the excess proceeds from an asset sale offer.

--Richard Barbour II
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