By Katy Burne and Patrick McGee
Dell Inc. (DELL) bonds fell spectacularly Monday and the cost to
insure them against default soared amid reports that the computer
maker is in buyout talks with private-equity firms.
Five-year protection sold in the form of credit-default swaps
rose to 285 basis points from 197 basis points, equivalent to a
rise of $88,000 a year to insure $10 million worth of the debt,
according to Markit data.
Meanwhile, Dell's 5.875% bonds coming due for repayment on June
15, 2019, were seen trading at 110.525 cents on the dollar, down
from 118.555 late Friday, according to data provider
MarketAxess.
The drop is substantial for such a short time period and a
single-A-rated company that is comfortably in investment-grade
territory. The yield on the 2019 debt, which moves inversely to its
price, rose to 3.669% from 2.309% as of Friday.
Andrew Brenner, global head of international fixed income at
National Alliance, said Dell bonds are "becoming toxic" on the
buyout rumors. "In order for Dell to go private, they'd have to
issue debt and buy back stock. Leverage ratios would go through the
roof," Mr. Brenner warned.
Bloomberg reported the talks for Dell to go private. Dell shares
rose 13% on the news. A company representative in Round Rock,
Texas, didn't immediately return a request for comment.
The tumble in Dell bond prices "highlights the importance of
buying bonds with very good covenant protection," said portfolio
manager Scott Kimball at the BMO TCH Corporate Income Fund,
speaking about terms in bond agreements designed to protect
investors. Mr. Kimball said those protections are increasingly
important because "the longer interest rates stay low, the more of
this activity we will see."
Egan-Jones Ratings Co. said in a note to clients that the
rumored buyout was "problematic," citing declining revenue, lower
operating income and slow PC growth at Dell.
Write to Katy Burne at katy.burne@dowjones.com and Patrick McGee
at patrick.mcgee@dowjones.com
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