Credit Ratings Agency: Dell Downgrade on Buyout, Junk Status Imminent

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Dell Inc. (NASDAQ: DELL) may still be involved in a massive go-private transaction which may or may not have a competing bid of sorts from Carl Icahn. Now Dell is faced with a credit rating agency downgrade. Standard & Poor’s has cut the rating to “BBB” from “A-” and the rating outlook remains on Watch Negative.

S&P based the downgrade after earnings fell by 79%. It also downgraded Dell’s commercial paper rating to “A-2” from “A-1” as a part of the move. All ratings remain on CreditWatch¬†with negative implications.

What S&P is signaling is that the ratings will likely be lowered again in the future. The real warning is that the downgrade warning ahead signals that it would be outside of investment grade parameters if the $24.4 billion acquisition by Michael Dell and Silver Lake is actually completed.

Another weakness is highlighted in the company’s computing segment that accounts for 63% of sales having seen its operating margins fall to 2.5% from 6.5% a year earlier. S&P sees highly competitive market conditions continuing in the PC market. S&P believes that this will pressure cash flow and EBITDA margin. Another issue is that Dell’s expected $2 billion in operating costs will not fully be realized before the end of fiscal year 2015.

Dell shares closed up 1-cent at $13.41 on the day. That still leaves only 1.7% of merger arbitrage profits left until the deal closes.