Following a review, Moody’s cut EDS’ unsecured notes from Baa3, the lowest investment grade, to Ba1, considered the first rung down into junk territory. The ratings outlook is negative, the firm added.
A ratings cut can lead to higher interest charges on a company’s debt, and make it harder to raise cash on the debt markets. Ratings changes can also be a trigger for other actions under a company’s contracts with suppliers. Moody’s said around $4bn of EDS debt was covered by its ratings change.
Moody’s cited EDS’ ongoing business risk, the modest pace of improvement associated with its turnaround program, and low levels of free cash flow. Because of the slow pace of EDS’ multi-year turnaround, said Moody’s, free cash flow is not sufficient to support an investment grade rating.
It said the negative outlook reflected the challenge EDS faces in improving cash flow from underperforming contracts.
Moody’s said the outlook could be stabilized by improved operating margins, profitable new contract signings, improved performance of large contracts and improved free cash flow. A material dividend or additional equity could also help, it said.
EDS quickly issued a rebuttal to the Moody’s statement, saying it was in strong disagreement with Moody’s decision. It insisted it has significantly reinforced its financial position, improved its competitiveness and expected to meet guidance on its second quarter results.
An EDS spokesman said that as far as the firm was concerned, it was a strong investment grade company.
EDS said that it was assessing the impact of Moody’s downgrade. It said it had no current plans to go ahead with an equity offering under its current shelf registration statement, and its current capital structure was sufficient to support its growth plans. At the same time, it said it continued to evaluate a dividend cut, but this was an issue to be addressed by its board.
EDS’ spokesman said Moody’s decision affected around $1.1bn of debt due in 2013, and that the interest rate on this would rise half a percent to 6.5%.
Rival rating agency Fitch yesterday affirmed its investment grade rating on EDS. Standard and Poors has EDS on creditwatch, but so far maintains EDS at investment grade.
