OREANDA-NEWS. Fitch Ratings has rated co-issuers', Diamond 1 Finance Corporation (Finco 1) and Diamond 2 Finance Corporation (Finco 2), senior unsecured notes offering 'BB+' ahead of Dell Inc.'s (Dell) acquisition of EMC Corp. (EMC).

Following the acquisition, Finco 1 will merge into Dell International LLC (Dell International), a wholly owned subsidiary of Dell, and Finco 2 will merge into EMC. Dell International and EMC will be the respective surviving entities and co-issuers and will assume all of Finco 1's and Finco 2's obligations under the notes, related indentures and other financings incurred to facilitate the EMC acquisition, including $20 billion of senior secured notes issued May 17, 2016.

Finco 1 and Finco 2 will deposit the gross proceeds from the unsecured notes to an escrow account, which will be pledged as security for the benefit of holders of the unsecured notes. The senior unsecured notes include special mandatory redemption at 100% of initial issue price plus accrued interest if the EMC acquisition does not close on or prior to Dec. 16, 2016. The new senior unsecured notes will be structurally senior to Dell's and EMC's existing senior unsecured indebtedness, resulting in an at least one notch lower rating for these existing senior unsecured instruments.

Dell and Dell International's current 'BB' Issuer Default Rating (IDR) and related specific issue-level ratings remain on Rating Watch Positive. Fitch placed Dell and Dell International's ratings on Rating Watch Positive on Oct. 13, 2015 following the announcement Dell will acquire EMC Corporation for a total consideration of $67 billion. The senior unsecured notes rating assigned in this release and other debt incurred to fund the EMC acquisition are not on Watch Positive. A full list of rating actions follows at the end of this release.

Resolution of the Positive Rating Watch will be triggered upon the successful closing of the EMC acquisition and will be predicated on Fitch's view of Dell's pro forma capital structure, the reasonableness of the company's debt reduction plan and related potential asset sales and execution risks surrounding the realization of anticipated cost synergies.

KEY RATING DRIVERS

The ratings and Outlook reflect Fitch's expectations for:

--Significant post-merger debt reduction: Fitch expects Dell will use $4 billion to $5 billion of combined annual free cash flow (FCF) and net proceeds from the recently announced approximately $3.1 billion sale of Dell Services to NTT Data Corp. for debt reduction. Dell announced the definitive agreement on March 28, 2016 and expects the deal to close in the current fiscal year, pending customary regulatory approvals. Fitch expects any incremental asset divestitures would accelerate debt reduction.

--Weak credit protection measures: Fitch expects credit protection measures will remain weak through at least fiscal 2018. Fitch estimates Dell will close the EMC acquisition with core leverage (excluding debt and operating EBITDA associated with the financing unit) of roughly 6x. Nonetheless, Fitch believes debt reduction from asset divestitures, growing FCF from profit margin expansion and more efficient working capital management can drive core leverage approaching 3x in fiscal 2019.

--Increased scale and diversification: Fitch believes the addition of EMC increases Dell's scale and diversification, including share leadership in rapidly growing emerging storage markets, as well as strong positions in high-value and mid-range legacy products. The addition of EMC increases Dell's annual revenue by 50% to roughly $75 billion and more than doubles Dell's operating EBITDA to nearly $8.5 billion (before acquisition related synergies) from a Fitch estimated $3.2 billion for fiscal year ended Jan. 29, 2016.

--Still-meaningful PC exposure: Despite a more diversified post-combination sales mix, Dell will remain meaningfully exposed to the PC market, which remains in secular decline. Dell's PC exposure, which is embedded in the Client Solutions Group (CSG) segment, will decrease to roughly half of sales (excluding VMware and Dell Services) from more than two-thirds and to less than 40% of segment operating income from well over half as the result of the EMC acquisition. Fitch believes the PC market could begin stabilizing over the intermediate term benefiting from an aging installed base and processor refreshes but shipments will decline by a mid-single-digit rate in calendar 2016 and low-single-digit rate in calendar 2017. Meanwhile, Fitch expects Dell, along with the other three top PC vendors, will continue consolidating share from smaller players.

--Stable enterprise performance: Fitch expects operating performance for Dell's Enterprise Services Group (ESG), which sells x86 servers and networking gear to enterprise customers, will remain stable, despite the significant majority of market growth coming from hyperscale providers buying from original design manufacturers (ODM). While hyperscale could represent more than 40% of the server shipment market over the intermediate term, Fitch expects low-single-digit growth for the rest of the market, including enterprise and tier 2 cloud providers, which typically require higher service and support. Increasing attach rates should also bolster operating results.

--Credible profit expansion roadmap: Fitch expects operating EBITDA growth and margin expansion from Dell's $2 billion of acquisition-related annual cost synergies, which are incremental to Dell's $550 million and EMC's $800 million of standalone annual cost take-down programs currently being executed. Dell anticipates achieving acquisition synergies on a run-rate basis in fiscal 2018. In addition to customary eliminations of overlapping fixed costs, Fitch expects Dell's increased purchasing scale and more efficient supply chain will drive costs savings. Fitch expects operating EBITDA approaching $12 billion in fiscal 2018 and ranging from $12 billion to $14 billion over the intermediate term with operating EBITDA margins expanding to the mid-teens from low-teens over the same timeframe.

--Emerging storage leadership: Fitch expects EMC's leadership in emerging storage solutions to strengthen operating results. EMC's strong share positions in emerging storage solutions (all flash arrays, converged and scale-out NAS and object) to grow at varying rates at well over double-digits and offset negative 10% growth in legacy storage products, in which Dell and EMC combined also have strong share. Gross profit margin should remain pressured by this transition, although Fitch expects standalone cost reductions and acquisition-related cost synergies will stabilize operating profitability in the Information Storage segment over the intermediate term.

--Support from VMware: Fitch includes operating results representing EMC's proportional share of VMware, the leading virtual storage-maker in which EMC has an 81% equity ownership stake. Fitch expects Dell will continue consolidating VMware's operating results, including more than $6.6 billion of revenues and $2 billion of Fitch estimated operating EBITDA for 2015. Fitch expects mid - to high-single-digit top-line growth for VMware through the intermediate term and stable profit margins from ongoing cost realignments. Fitch considers VMware an important element of Dell's technology portfolio and in achieving potential revenue synergies. As a result, Fitch does not anticipate VMware paying dividends (aside from the expectation Dell will roll over $1.5 billion of inter-company notes benefitting EMC) or directly supporting debt at Dell.

--Upon consummation of Dell's acquisition of EMC, the new secured notes and guarantees will be secured on a pari passu basis with the senior secured credit facilities, on a first-priority basis by all the tangible and intangible assets of the issuers and guarantors that secure obligations under the senior secured credit facilities, including pledges of all capital stock of the issuers, of Dell and certain wholly-owned material subsidiaries of the issuers and guarantors (limited to 65% of the voting stock of any foreign subsidiary). The collateral will not include a pledge of certain assets or equity interests of certain subsidiaries, including VMware.