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EMC bondholders down more than half a billion amid Dell deal

NEW YORK — Dell Inc.’s $67 billion buyout of EMC Corp. is shaping up to be a win for nearly everyone involved, except for the data-storage company’s bondholders.

Investors in EMC’s $5.5 billion of bonds are down about $537 million since news of the deal first became public last week.

They are selling off because of concerns that Dell’s plan to raise about $50 billion in debt for the acquisition will push existing bondholders down the capital structure, putting more creditors ahead of them to be repaid in the event the company runs into trouble. The EMC notes lack protections that would have allowed bondholders to demand early repayment in the event of an ownership change.


“From the perspective of EMC bondholders, we’d like to see the deal not happen,” said Joe Mayo, head of credit research at Conning, a global insurance investment manager that owns EMC bonds. “They’re going to end up at the bottom of the pile when all is said and done.”

He said EMC was able to “get away without” putting in change- of-ownership protections when it sold the bonds in 2013 by offering juicier yields than investors expected from a company with its investment-grade rating.

The longest portion of that offering, $1 billion of 3.375 percent bonds due in 2023, sold to yield 0.12 percentage point more than the average yield on bonds with its rating, according to index data from Bank of America Merrill Lynch.

“It takes a lot of discipline on the part of the bond market to maintain consistency of keeping that kind of protection in the bond indenture,” Mayo said. Conning oversees about $92 billion in assets.

With mergers and acquisitions in the United States set for a record year, “change of control” covenant protection could become increasingly important for debt investors, said Kent White, an investment-grade money manager at Thrivent Financial, which oversees about $96 billion in assets, including EMC bonds.


“Because of the M&A environment, maybe we start looking for downside protection in high-rated names,” he said. “The investment-grade market isn’t always as disciplined as it could be. Maybe that changes going forward.”

Investors are demanding 1.73 percentage points above government debt to own corporate bonds in the United States, Bank of America Merrill Lynch index data show. That is up from a post-crisis low of 1.06 percentage points in June 2014.

Dell may issue a “decent amount” of debt from the EMC subsidiary to come up with a chunk of the $47 billion in cash CreditSights Inc. analyst Erin Lyons estimates it will need to fund the deal.

The company could also layer new debt ahead of EMC bonds, which would result in further losses for bondholders, Lyons wrote.

“We’re very confident of our ability to place the quantum of debt that we need to place,” said Thomas Sweet, Dell’s chief financial officer, according to a transcript of an Oct. 12 conference call with media to discuss the EMC takeover. “The banks are fully committed and have given us that committed funding. We believe the markets are open.”