Unisys Corp’s ability to borrow new money and the amount it will have to pay have significantly deteriorated following a decision by Standard & Poor’s Corp to downgrade the ratings on the company and its Unisys Finance Corp unit’s senior debt to Triple-B from Single-A-Minus. Also downgraded are Unisys Corp’s subordinated debt to triple-B-minus from triple-B-plus and preferred stock to double-B-plus from triple-B. A daunting $5,400m of debt and preferred stock is affected; the rating agency said that Unisys has experienced meaningful erosion of its balance sheet due to losses, restructuring charges, and increased use of debt to finance operations; debt to total capital in excess of 50% is high for a company with this kind of operating risk; and increased competitive pricing industrywide could continue to limit return on permanent capital and cash flow improvement. However, recent restructurings, which included substantial lay-offs and manufacturing consolidations, should considerably lower the cost base and return the company to profitability near term. The company’s transition from being primarily a supplier of proprietary mainframes to a vendor of a broad range of open systems will be difficult to manage and should pressure margins over the next few years. But the company has a large installed base and is very early in the product cycle of its 2200 mainframe product line – its largest revenue contributor – which should provide a cushion of recurring revenue during the transition, the agency concluded.
