NOTE 5—FINANCIAL SERVICES
Dell Financial Services
The Company offers or arranges various financing options and services for its business and consumer customers in the United States, Canada, Europe, and Mexico through Dell Financial Services and its affiliates (“DFS”). The key activities of DFS include the origination, collection, and servicing of customer receivables primarily related to the purchase of Dell products and services. New financing originations, which represent the amounts of financing provided by DFS to customers for equipment and related software and services, including third-party originations, were $3.7 billion for the fiscal years ended ended January 29, 2016 and January 30, 2015, and $1.0 billion and $2.3 billion for the successor period ended January 31, 2014 and the predecessor period ended October 28, 2013, respectively.
The Company’s financing receivables are aggregated into the following categories:
| • | Revolving loans—Revolving loans offered under private label credit financing programs provide qualified customers with a revolving credit line for the purchase of products and services offered by |
- F-25 -
DENALI HOLDING INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| Dell. These private label credit financing programs are referred to as Dell Preferred Account (“DPA”) and Dell Business Credit (“DBC”). The DPA product is primarily offered to individual consumer customers, and the DBC product is primarily offered to small and medium-sized commercial customers. Revolving loans in the United States bear interest at a variable annual percentage rate that is tied to the prime rate. Based on historical payment patterns, revolving loan transactions are typically repaid within twelve months on average. |
| • | Fixed-term sales-type leases and loans—The Company enters into sales-type lease arrangements with customers who desire lease financing. Leases with business customers have fixed terms of generally two to four years. Future maturities of minimum lease payments as of January 29, 2016, were as follows: Fiscal 2017—$1,541 million; Fiscal 2018—$1,021 million; Fiscal 2019—$458 million; Fiscal 2020—$111 million; Fiscal 2021 and beyond—$17 million. The Company also offers fixed-term loans to qualified small businesses, large commercial accounts, governmental organizations, educational entities, and certain individual consumer customers. These loans are repaid in equal payments including interest and have defined terms of generally three to five years. |
The following table summarizes the components of the Company’s financing receivables segregated by portfolio segment as of January 29, 2016 and January 30, 2015:
| Successor | ||||||||||||||||||||||||
| January 29, 2016 | January 30, 2015 | |||||||||||||||||||||||
| Revolving | Fixed-term | Total | Revolving | Fixed-term | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Financing Receivables, net: |
||||||||||||||||||||||||
| Customer receivables, gross |
$ | 1,173 | $ | 3,637 | $ | 4,810 | $ | 1,438 | $ | 3,291 | $ | 4,729 | ||||||||||||
| Allowances for losses |
(118 | ) | (58 | ) | (176 | ) | (145 | ) | (49 | ) | (194 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Customer receivables, net |
1,055 | 3,579 | 4,634 | 1,293 | 3,242 | 4,535 | ||||||||||||||||||
| Residual interest |
— | 458 | 458 | — | 490 | 490 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Financing receivables, net |
$ | 1,055 | $ | 4,037 | $ | 5,092 | $ | 1,293 | $ | 3,732 | $ | 5,025 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Short-term |
$ | 1,055 | $ | 1,860 | $ | 2,915 | $ | 1,293 | $ | 1,729 | $ | 3,022 | ||||||||||||
| Long-term |
— | 2,177 | 2,177 | — | 2,003 | 2,003 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Financing receivables, net |
$ | 1,055 | $ | 4,037 | $ | 5,092 | $ | 1,293 | $ | 3,732 | $ | 5,025 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The following table summarizes the changes in the allowance for financing receivable losses for the respective periods:
| Successor | ||||||||||||||||||||||||
| Fiscal Year Ended January 29, 2016 |
Fiscal Year Ended January 30, 2015 |
|||||||||||||||||||||||
| Revolving | Fixed-term | Total | Revolving | Fixed-term | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Allowance for financing receivable losses: |
||||||||||||||||||||||||
| Balance at beginning of period |
$ | 145 | $ | 49 | $ | 194 | $ | 171 | $ | 44 | $ | 215 | ||||||||||||
| Charge-offs, net of recoveries |
(105 | ) | (17 | ) | (122 | ) | (151 | ) | (17 | ) | (168 | ) | ||||||||||||
| Provision charged to income statement |
78 | 26 | 104 | 125 | 22 | 147 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at end of period |
$ | 118 | $ | 58 | $ | 176 | $ | 145 | $ | 49 | $ | 194 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
- F-26 -
DENALI HOLDING INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| Successor | Predecessor | |||||||||||||||||||||||
| October 29, 2013 through January 31, 2014 |
February 2, 2013 through October 28, 2013 |
|||||||||||||||||||||||
| Revolving | Fixed-term | Total | Revolving | Fixed-term | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Allowance for financing receivable losses: |
||||||||||||||||||||||||
| Balance at the beginning of period |
$ | — | $ | — | $ | — | $ | 169 | $ | 23 | $ | 192 | ||||||||||||
| Charge-offs, net of recoveries |
(35 | ) | (4 | ) | $ | (39 | ) | (104 | ) | (15 | ) | (119 | ) | |||||||||||
| Provision charged to income statement |
206 | 48 | $ | 254 | 79 | 16 | 95 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at end of period |
$ | 171 | $ | 44 | $ | 215 | $ | 144 | $ | 24 | $ | 168 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
On October 29, 2013, in connection with the acquisition of Dell by Denali Holding, the Company’s financing receivables, net, were re-measured on a fair value basis and recognized in the Consolidated Statement of Financial Position accordingly. In addition, in accordance with authoritative guidance for business combinations, the Company recorded a provision for losses of $204 million on customer receivables to recognize an estimate of incurred losses on principal balances. The provision was calculated using the same methodology in determining the allowance for the Predecessor entity and was recognized in cost of net revenue in the Consolidated Statement of Income (Loss) for the Successor entity.
The following table summarizes the aging of the Company’s customer financing receivables, gross, including accrued interest, as of January 29, 2016 and January 30, 2015, segregated by class:
| Successor | ||||||||||||||||||||||||||||||||
| January 29, 2016 | January 30, 2015 | |||||||||||||||||||||||||||||||
| Current | Past Due 1—90 Days |
Past Due > 90 Days |
Total | Current | Past Due 1—90 Days |
Past Due > 90 Days |
Total | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Revolving—DPA |
$ | 812 | $ | 99 | $ | 36 | $ | 947 | $ | 969 | $ | 140 | $ | 54 | $ | 1,163 | ||||||||||||||||
| Revolving—DBC |
202 | 20 | 4 | 226 | 244 | 26 | 5 | 275 | ||||||||||||||||||||||||
| Fixed-term—Consumer and Small Commercial |
315 | 11 | 3 | 329 | 319 | 14 | 3 | 336 | ||||||||||||||||||||||||
| Fixed-term—Medium and Large Commercial |
3,131 | 157 | 20 | 3,308 | 2,800 | 138 | 17 | 2,955 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total customer receivables, gross |
$ | 4,460 | $ | 287 | $ | 63 | $ | 4,810 | $ | 4,332 | $ | 318 | $ | 79 | $ | 4,729 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Credit Quality
The following table summarizes customer receivables, gross, including accrued interest, by credit quality indicator segregated by class, as of January 29, 2016 and January 30, 2015. The categories shown in the table below segregate customer receivables based on the relative degrees of credit risk. The credit quality indicators for DPA revolving accounts are measured primarily as of each quarter-end date, while all other indicators are generally updated on a periodic basis.
For DPA revolving receivables shown in the table below, the Company makes credit decisions based on proprietary scorecards, which include the customer’s credit history, payment history, credit usage, and other credit agency-related elements. The higher quality category includes prime accounts generally of a higher credit quality that are comparable to U.S. customer FICO scores of 720 or above. The mid-category represents the mid-
- F-27 -
DENALI HOLDING INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
tier accounts that are comparable to U.S. customer FICO scores from 660 to 719. The lower category is generally sub-prime and represents lower credit quality accounts that are comparable to U.S customer FICO scores below 660. For the DBC revolving receivables and fixed-term commercial receivables shown in the table below, an internal grading system is utilized that assigns a credit level score based on a number of considerations, including liquidity, operating performance, and industry outlook. The grading criteria and classifications for the fixed-term products differ from those for the revolving products as loss experience varies between these product and customer groups. The credit quality categories cannot be compared between the different classes as loss experience varies substantially between the classes.
| Successor | ||||||||||||||||||||||||||||||||
| January 29, 2016 | January 30, 2015 | |||||||||||||||||||||||||||||||
| Higher | Mid | Lower | Total | Higher | Mid | Lower | Total | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Revolving—DPA |
$ | 148 | $ | 270 | $ | 529 | $ | 947 | $ | 165 | $ | 327 | $ | 671 | $ | 1,163 | ||||||||||||||||
| Revolving—DBC |
$ | 68 | $ | 65 | $ | 93 | $ | 226 | $ | 84 | $ | 80 | $ | 111 | $ | 275 | ||||||||||||||||
| Fixed-term—Consumer and Small Commercial |
$ | 93 | $ | 136 | $ | 100 | $ | 329 | $ | 92 | $ | 145 | $ | 99 | $ | 336 | ||||||||||||||||
| Fixed-term—Medium and Large Commercial |
$ | 1,597 | $ | 1,075 | $ | 636 | $ | 3,308 | $ | 1,701 | $ | 761 | $ | 493 | $ | 2,955 | ||||||||||||||||
DFS Acquisitions
During Fiscal 2014, prior to the acquisition of Dell by Denali Holding, the Company completed its acquisition of CIT Vendor Finance’s Dell-related financing assets portfolio and sales and servicing functions in Europe to enable global expansion of the Company’s direct finance model. This acquisition included a purchased portfolio of $374 million in gross contractual payments under fixed-term leases and loans with a fair value at purchase of approximately $356 million. As part of the same purchase, the Company acquired a liquidating portfolio of operating leases which are included in property, plant, and equipment in the Consolidated Statements of Financial Position. At the time of the acquisition, the gross amount of the equipment associated with these operating leases was approximately $169 million. In connection with this transaction, a subsidiary of the Company, Dell International Bank Limited, obtained a bank license from The Central Bank of Ireland to facilitate the Company’s ongoing offerings of financial services in Europe.
Securitizations and Structured Financing Debt
The Company transfers certain U.S. customer financing receivables to Special Purpose Entities (“SPEs”) that meet the definition of a Variable Interest Entity (“VIE”) and are consolidated, along with the associated debt, into the Company’s Consolidated Financial Statements, as the Company is the primary beneficiary of those VIEs. These SPEs are bankruptcy remote legal entities with separate assets and liabilities. The purpose of these SPEs is to facilitate the funding of customer receivables in the capital markets.
The following table shows financing receivables held by the consolidated VIEs as of the respective dates:
| Successor | ||||||||
| January 29, 2016 |
January 30, 2015 |
|||||||
| (in millions) | ||||||||
| Financing receivables held by consolidated VIEs, net: |
||||||||
| Short-term, net |
$ | 2,125 | $ | 2,086 | ||||
| Long-term, net |
1,215 | 891 | ||||||
|
|
|
|
|
|||||
| Financing receivables held by consolidated VIEs, net |
$ | 3,340 | $ | 2,977 | ||||
|
|
|
|
|
|||||
- F-28 -
DENALI HOLDING INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Financing receivables transferred via securitization through SPEs were $3.2 billion and $2.7 billion for the fiscal years ended January 29, 2016 and January 30, 2015, respectively.
Some of the SPEs have entered into financing arrangements with multi-seller conduits that, in turn, issue asset-backed debt securities in the capital markets. The Company’s risk of loss related to securitized receivables is limited to the amount by which the Company’s right to receive collections for assets securitized exceeds the amount required to pay interest, principal, and fees and expenses related to the asset-backed securities. The Company provides credit enhancement to the securitization in the form of over-collateralization.
The Company’s total structured financing debt, which is collateralized by financing receivables in the U.S., Canada, and Europe, was $3.4 billion and $2.7 billion, as of January 29, 2016 and January 30, 2015, respectively, under the following programs:
| • | The structured financing debt program in the U.S., which is related to the fixed-term lease and loan securitization program and the revolving loan securitization program, was $1.3 billion and $1.8 billion as of January 29, 2016 and January 30, 2015, respectively. This debt is collateralized solely by the U.S financing receivables in the programs. The debt has a variable interest rate and the duration of this debt is based on the terms of the underlying financing receivables. As of January 29, 2016, the total debt capacity related to the securitization programs was $2.1 billion. The Company enters into interest swap agreements to effectively convert the portion of its structured financing debt from a floating rate to a fixed rate. See Note 7 of the Notes to the Audited Consolidated Financial Statements for additional information about interest rate swaps. |
The Company’s securitization programs became effective on October 29, 2013. The revolving program is effective for three years. The fixed term program, which was extended during the first quarter of Fiscal 2016, is effective for four and one-half years. The programs contain standard structural features related to the performance of the securitized receivables which include defined credit losses, delinquencies, average credit scores, and minimum collection requirements. In the event one or more of these criteria are not met and the Company is unable to restructure the program, no further funding of receivables will be permitted and the timing of the Company’s expected cash flows from over-collateralization will be delayed. As of January 29, 2016, these criteria were met.
| • | The Company may periodically issue asset-backed debt securities to private investors. As of January 29, 2016, the associated debt balance of these securities was $1.6 billion. The asset-backed debt securities are collateralized solely by the U.S. fixed-term financing receivables in the offerings, which are held by SPEs. The interest rate on these securities is fixed and ranges from 0.26% to 3.61% and the duration of these securities is based on the terms of the underlying financing receivables. See Note 4 of the Notes to the Audited Consolidated Financial Statements for additional information regarding the Company’s structured financing debt. |
| • | In connection with the Company’s international financing operations, the Company has entered into revolving structured financing debt programs related to its fixed-term lease and loan products sold in Canada and Europe. As of January 29, 2016, the Canadian program, which is effective for two years, beginning on September 19, 2014, and is collateralized solely by the Canadian financing receivables, had a total debt capacity of $135 million. The European program, which was extended during the first quarter of Fiscal 2016, is effective for four years, beginning on December 23, 2013. The program is collateralized solely by the European financing receivables and had a total debt capacity of $653 million as of January 29, 2016. The aggregate outstanding balances of the Canadian and European revolving structured loans as of January 29, 2016 and January 30, 2015 were $559 million and $388 million, respectively. |
- F-29 -
DENALI HOLDING INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Financing Receivable Sales
To manage certain concentrations of customer credit exposure, the Company may sell selected fixed-term financing receivables to unrelated third parties on a periodic basis. During the fiscal years ended January 29, 2016 and January 30, 2015, the amount of receivables sold was $91 million and $61 million, respectively. During the successor period ended January 31, 2014, the Company did not sell any receivables. During the predecessor period ended October 28, 2013, the amount of receivables sold was $127 million.
