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Dell still searching for financing alternative to CIT Print E-mail

By Matthew Quinn

The freeze-up in the commercial paper market that began in 2007 left leasing businesses that used it as a primary source of capital searching for alternatives.

One company caught up in the mess was Dell and its Dell Financial Services unit.

Even though Dell ended a joint venture with CP-dependent CIT in 2007 after 11 years, about a quarter of its finance subsidiary's $2.1 billion in receivables at the beginning of 2008 had been underwritten by CIT.

In March 2008 --the same month CIT was forced to draw down a $7.3 billion credit facility to meet its funding needs-- the computer maker announced it was "undertaking a strategic assessment of ownership alternatives for its Dell Financial Services financing activities."

"We plan to look at alternatives that will strengthen the product offerings, enhance customer experience and improve DFS' overall financial services capabilities in the most efficient way," said then-CFO Don Carty in a press release.

Fast-forward to the present and the situation appears very much the same.

Current Dell CFO Brian Gladden told analysts today that the company has to fund some of the growth in DFS and will likely need to provide it more capital later in the year, according to Bloomberg.

"We continue to review alternative sources of capital as markets continue to loosen up and we'll update you on those as we move forward," Gladden said at an analyst meeting in Austin, Texas. "From a capital allocation standpoint, we continue to be well positioned for the future with strong liquidity."

The financings underwritten by CIT continue to run off the books, but a significant relationship still exists.

CIT still has the right to purchase a percentage of new customer receivables from DFS through its fiscal 2010, which ends January 30, according to Dell's most recent 10-Q. CIT's funding right was up to 35% in fiscal 2009 and is up to 25% in 2010. For the three months ended May 1, 2009, CIT's funding percentage was approximately 31%.

Gladden didn't shed any light on what alternative sources of capital are being looked at, but one would assume that the CP and asset-backed securities markets aren't too appealing given the dislocation experienced there.

That probably leaves a dilutive deal, as pointed out by an analyst in the Bloomberg story. Quite a scary proposition for investors in Dell stock, which was already down 50% from its 52-week high.

Indeed, shares were down 8% in afternoon trading.

Maybe a CIT failure has more systemic risk than once thought.

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