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Dell bondholders not psyched

By Sheyna Steiner ·
Wednesday, February 6, 2013
Posted: 5 pm ET

This week, computer-maker Dell announced it was going private. In a deal worth $24.4 billion, founder Michael Dell will buy the company back from the stockholders, according to the press release issued by Dell.

Following the news, owners of bonds issued by Dell hustled to try to sell, The Wall Street Journal reported in the story, "Dell bonds slump following LBO details."

Spreads on its 5.875 percent bonds due 2019 widened 22 (basis points); spreads on 5.4 percent bonds due 2040 are 17 bps wider, per MarketAxess.

Existing bondholders are "likely to be structurally subordinate to most of the new LBO debt," according to a CreditSights' Jan. 21 report.

Shorter-term notes, by contrast, rally; 2.30 percent bonds due 2015 are 32 bps tighter at 142 bps. CreditSights said debt maturing between 2013-2016 is likely to be refinanced.

When bond yields go up, that means the price of the bond has gone down. It could be trading below par – though the bond holder will still receive the face value at maturity. Conversely, when yields go down, as with the shorter-term notes, the bonds are worth more to buyers today than they were previously – though the bond holder will still receive the face value at maturity.

"The Dell bonds had a minicrash," says Donald Cummings Jr., managing partner at Blue Haven Capital in Geneva, Ill.

"People think that the structure of Dell is not going to be favorable to the bondholders -- at least that was the thinking yesterday," he says.

The deal will tack an additional $15 billion worth of debt onto the company, The New York Times DealBook reported on Tuesday. In light of that, the skittishness of long-term bondholders is understandable -- particularly as they're likely to be behind the new creditors in the event of a default.

"Sometimes. buyouts improve the bond's rating and the viability of the bond, but sometimes they load the company up with debt, and it increases the liability of the bond, and then the price falls," says Cummings.

Based on the news so far, would you be nervous if you owned a long Dell bond?

Follow me on Twitter: @SheynaSteiner.

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1 Comment
Joe Horstmann
April 03, 2013 at 12:12 am

I am curious what your take on Dell bonds are almost 2 months after this article. It seems like Dell is in the news daily and dont see how this can be good for long term bond holders. If you had to write this article today would the outlook be the same? Thanks for your time