Fitch Ratings has rated co-issuers, Dell International LLC's and EMC Corp.'s, senior notes 'BBB'.
The senior notes will be pari passu with Dell's senior unsecured obligations. Fitch expects the transaction to be leverage neutral and the companies will use net proceeds to repay $1 billion of 5.45% senior notes due June 2023 and any remaining net proceeds for corporate purposes, including the repayment of other debt.
Key Rating Drivers
Strengthened Financial Profile: Dell's strengthened financial profile with solid adjusted FCF and low core leverage (core debt/core EBITDA) provides flexibility as the company faces nearer-term headwinds from weakening PC shipments and enterprise infrastructure spending amidst concerns over recession. Over the longer term, Fitch expects modest but consistent organic revenue growth and the company to sustain profit margins and cash flow metrics, which should enable the company to maintain target core credit metrics of 1.5x-2.0x.
PC Market Leader: Fitch expects Dell to continue outperforming the PC market through share consolidation on top of stronger and more resilient than previously expected market growth. Dell's computing solutions group (CSG) segment is poised for another year of double-digit growth from solid consumer PC demand and recovering commercial markets. Scale-driven market consolidation by the top three PC makers, including Dell, should continue to fuel growth for this business, despite long-held risks of PC market maturation.
Challenging Demand Environment: Fitch expects challenging infrastructure spending dynamics will constrain growth for Dell's infrastructure solutions group (ISG) segment. Fitch forecasts low-single-digit growth for ISG, but demand for infrastructure spending will remain volatile and constrained by customer hybrid infrastructure-optimization trends. Meanwhile, Fitch expects macroeconomic headwinds and digestion of robust demand for PCs during the COVID-19 pandemic will weigh on near-term revenue.
Standalone Profitability Profile: Fitch expects Dell's profit margins will moderate from peak levels in recent years over the near term, due to macroeconomic headwinds, including higher input prices. The resumption of ISG and commercial PC growth should drive modest profit margin expansion over the longer term, although Fitch forecasts core EBITDA margins will remain in the high-single digits, down from 10% in in recent years.
Derivation Summary
Dell's credit profile is in-line with the 'BBB' rating, with the company's strong financial structure and flexibility, diversification and scale-based competitive advantages offsetting mature growth dynamics and comparatively low profitability. Fitch believes Dell's business profile is well-positioned compared with IT hardware provider peers, including Hewlett Packard Enterprise Company (HPE; BBB+/Stable) and HP Inc. (BBB+/Stable), given the scale and diversification of its installed base.
Dell's financial structure is in line with that of HPE, with Dell's slightly stronger and more consistent cash flow profile offset by HPE's higher profit margins due to Dell's nearly two-thirds mix of PC and peripherals sales. Dell's operating profile is equally positioned to that of HP, which has a comparable PC business and faces secular challenges in its printing business. However, HP's financial profile is stronger, with higher FCF margins and a more conservative financial structure.
Dell's 'BBB' Long-Term IDR maps to either 'F2' or 'F3' short-term ratings under Fitch's Corporate Rating Criteria and Fitch believes Dell's financial flexibility factor is in-line with the minimum 'bbb+' that is required for the higher of the two short-term ratings. Fitch's criteria emphasizes the liquidity sub-factor, which has strengthened considerably now that core debt maturities should be easily manageable with core FCF through the forecast period. The 'F2' short-term rating also reflects Dell comfortably meeting the criteria's requirement of at least a 'bbb-' financial structure and 'a-' operating environment factor score.
Key Assumptions
Dell's revenue declines by low- to mid-single digits in fiscal 2023 and 2024, reflecting weaker demand, particularly in PCs;
Revenue grows by low single digits through the remainder of the forecast period from ongoing market-share gains;
Profitability moderates in fiscal 2023 and remains challenged in fiscal 2024 before expanding with a sales mix shift to ISG;
Dell uses cash flow for a combination of shareholder returns and debt reduction.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Expectations for core leverage at or below 2.0x and adjusted pre-dividend FCF to core debt sustained near 30%;
Consistent organic revenue growth from profitable market-share gains in CSG and ISG segments.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Expectations for core leverage sustained above 2.5x and adjusted pre-dividend FCF to core debt sustained near 20%;
Decline in organic revenue from sustained market-share losses in CSG and ISG segments.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity: Fitch believes Dell's liquidity should remain adequate and, as of Oct. 28, 2022, was supported by $4.9 billion of cash and cash equivalents and an undrawn $6 billion revolving credit facility expiring in 2027, which Fitch expects will back-stop Dell's CP program. Fitch's forecast for $3.5 billion to $4.5 billion of annual adjusted FCF also supports liquidity.
Issuer Profile
Dell is a leading global diversified technology infrastructure provider, with a comprehensive portfolio of IT hardware, software and service solutions spanning both traditional and emerging, multi-cloud technologies.
Summary of Financial Adjustments
Fitch calculates core metrics for Dell, which exclude the impact of the capital financing business, Dell Financial Services (DFS). Fitch applies a maximum allowable leverage ratio for DFS of 4:1 to financing receivables as part of its core debt estimation. Fitch also excludes changes in DFS financing receivables to arrive at adjust cash flow metrics.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
HP INC. 
