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More upside in Dell Technologies

| February 12, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

DELL senior secured bonds remain the widest trading credit in the technology curve. While spreads have tightened with the broader market since Amherst Pierpont reviewed the credit on January 22, there is still significant upside in the long-end of the curve for DELL bonds to outperform those of closely rated Broadcom Inc. (AVGO – Baa3/BBB-/BBB-).

DELL now trades on top of AVGO in the 10-year part of the curve, as the previous +20 bp spread differential between the two credits has collapsed. However, in the long end of the curve DELL 8.35% 7/15/46 bonds trade 114 bp (g-spread) behind AVGO 3.75% 2/15/51 bonds. This large spread differential takes into account the high dollar price associated with DELL’s bonds. Assuming 1.5 bp of additional spread per each dollar differential between DELL and AVGO bonds ($52) and no additional spread differential behind AVGO as the credits are trading flat to each other in the 10-year part of the curve, that would put fair value on the DELL 2046 bonds at roughly +243 bp (g-spread). That translates to roughly 30 bp of upside from current trading levels.

Exhibit 1. Technology BBB 20yr-30yr Curve

Source: Bloomberg TRACE; APS

S&P Has a New Outlook

S&P revised DELL’s outlook from negative to stable. The agency’s outlook revision reflects not only its view for a stable operating environment in fiscal 2022, but for continued debt reduction which will enable the company to maintain adjusted leverage well below 3.0x. S&P notes that the potential spin of VMWare (VMW) later this year is likely to result in the re-rating of DELL’s financial prospects, but the rating agency does not believe this will result in any type of negative rating action for both DELL and VMW.

DELL is set to report fiscal 4Q earnings on February 25, 2021, after the market close. While consensus estimates are calling for modest top line growth in the 1% area on a year-over-year basis, EBITDA margin is estimated to grow 180 bp (to 13.8%). Furthermore, adjusted EPS is forecast to be up over 126% year-over-year (to $2.12). Expectations are that management will have made good on their commitment to reduce debt by a $5.5 billion for the fiscal year, which underscores our positive view on the credit. Through fiscal 3Q, DELL had repaid $3.1 billion of total debt. With leverage at 2.9x at the end of fiscal 3Q, the additional $1.4 billion of debt reduction in fiscal 4Q should move DELL’s leverage to the mid-2.0x area. S&P noted that they expect further debt reduction in fiscal 2022, regardless of their strategy with VMW, which is likely to bring adjusted leverage to the low 2.0x area.

More Clarity on VMW Spin Needed for Upgrade

Despite already being below S&P’s 3.0x target for an upgrade to investment grade, the agency noted that they are not likely to upgrade DELL until there is more clarity on the VMW spin. With DELL’s business prospects expected to be weaker on stand-alone basis, S&P believes that DELL should maintain a stronger credit profile to offset the weakness. S&P will assess the company’s leverage profile upon the potential separation before revisiting the ratings. DELL is expected to use proceeds from the spin for further debt reduction as management has been very vocal about targeting IG ratings and credit profiles for both entities in a spin scenario. With DELL expected to fetch as much as $15 billion in a spin scenario, and proceeds expected to go to further debt reduction, there is little reason why DELL could not operate with leverage below 2.0x.

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