Dude, You’re Getting … Junk?

What’s happening with Dell?

Last week Dell concluded its leveraged buy-out. The company issued $20 billion in debt and bought back all its outstanding shares. The $13 billion or so in existing Dell debt was downgraded to junk-status, jumping about 3% in yield and falling in price. So you could say that Michael Dell extracted around $1.5 billion in value from existing debtholders to help finance the LBO.

But even thought the bonds are now B-rated, Dell is still a going concern, with a diversified global brand and over 100 thousand employees. The company’s revenues have been stable through the recent recession up through last year, and its cashflow and margins have been solid. Indeed, should Dell deliver on its business plan, the company could regain its investment-grade rating in as little as two years.

Still, the world is an uncertain place, and PC sales still comprise 20% of Dell’s global revenues. The “Bring Your Own Device” paradigm has upended markets. To sell computers to businesses, PC-makers need to be successful selling to consumers. That’s why Dell is trying to grow its tablet line. Tablets are a fragmented, volatile market, and a seamless tablet-PC hybrid has yet to be made.

If Michael Dell can pull this off, he’ll have saved the company. But this bumpy ride isn’t what the bondholders signed up for.

Douglas R. Tengdin, CFA

Chief Investment Officer

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