New York - Dell 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 as the two companies battle flagging demand, according to people with knowledge of the matter. That could be a tricky proposition for the 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. “They will have to do some work to get it done.”
Even if a merger between Dell and EMC is agreed in the coming days, the 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 and the Volkswagen emissions scandal unnerved investors.
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 company SunOpta and machine-parts maker NN, may be forced to lean on their banks to provide backup financing after failing to muster enough investor interest to price their bond deals.
“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. “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 October 7 report.
Scotts Miracle-Gro, a maker of garden products, sold $400 million of notes on 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?’”
BLOOMBERG