Approximately $25 billion of debt securities affected
New York, November 28, 2012 -- Moody's Investors Service lowered the long term credit ratings of Hewlett-Packard
(HP), including the senior unsecured rating to Baa1 from A3.
The Prime-2 short term rating is affirmed. This concludes
a review initiated October 4, 2012. The outlook is negative.
RATINGS RATIONALE
The new rating reflect our expectations that "although HP will maintain
strong to leading positions in a number of product areas, the company's
credit profile will remain weaker than previously expected over the intermediate
term," said Moody's senior vice president, Richard
Lane.
The negative rating outlook reflects our concerns about HP's ability
to contend with the significant competitive, secular and execution
challenges facing the company. A "broad portion of HP's portfolio,
including PC's, some enterprise servers, printers, and
services, representing over 75% of revenue, will face
slow to no growth prospects over the coming years," said Lane.
The ability to restore growth and profitability has sufficient uncertainty
that we believe event risk in the form of more shareholder friendly actions
or portfolio repositioning could develop, which would pressure the
company's credit ratings.
Key drivers to the projected credit profile include "company-specific
execution challenges in services and software, secular shifts in
PCs and printing, competitive pressures throughout its broad portfolio,
as well as a cautious demand environment," said Lane.
As a result, we expect HP's revenue will decline 5% next
year while operating margins approximate 7% as compared to a nearly
9.8% historical average prior to 2012 (using Moody's standard
adjustments). We also anticipate free cash flow (post dividends)
of approximately $4 billion next year, down from our prior
expectations of $6 billion to $7 billion, driven by
restructuring related cash outflows and overall weaker operating performance.
We believe HP will remain committed to reducing gross debt over the intermediate
term after having reduced debt by $2.2 billion in 2012.
We anticipate HP will repay at least half of its debt maturities over
the next few years. In fiscal 2013, debt maturities total
$5.5 billion with $1.5 billion due in March,
$1.75 billion in May and $1.1 billion in each
of August and September. HP has $4.9 billion and
$3.2 billion of debt maturities in 2014 and 2015.
Assuming HP repays approximately half of its debt maturities and refinances
the rest, we project HP's adjusted debt to EBITDA, estimated
at 2.0x at October 2012, will approximate 1.9x at
the end of 2013 and potentially 1.6x by 2015.
Ratings lowered include:
senior unsecured rating to Baa1 from A3
subordinated rating to (P)Baa2 from (P)Baa1
preferred rating to (P)Baa3 from (P)Baa2
Rating outlook negative
We expect HP's acquisition activity will be minimal over the next few
years as management focuses more on internal research and development
over acquisitions, where HP has demonstrated a poor track record.
While the less acquisitive posture reduces event risk, this approach
also raises the potential that HP could lose some competitive ground against
peers who have more flexibility to get to market faster with products
and technology offerings via acquisition.
HP maintains a solid liquidity profile. At the end of October 2012,
HP had $11.3 billion of cash and equivalents and we expect
HP will maintain cash balances in excess of $8 billion.
While a significant portion of this cash is held offshore, the company
has tax efficient access to material amounts of this cash. We project
about $4 billion of free cash flow in 2013, with the first
half being weaker than the second half due to some seasonality and heavier
restructuring cash outflows (primarily headcount).
The company maintains solid alternate liquidity to support outstanding
commercial paper ($574 million at July 2012) in the form of a $4.5
billion bank facility maturing February 2015 and a $3.0
billion bank facility maturing March 2017. Both have one financial
covenant under which HP has ample room, and no need to represent
as to no material adverse change.
HP's ratings are unlikely to be raised over the next year. The
rating could be stabilized over the 12 to 18 months if the company demonstrates
consistent execution and progress in restoring sustainable profitability
throughout its portfolio. Longer term, the ratings could
be raised if the company: (1) demonstrates steady organic revenue
growth; (2) is likely to sustain EBIT margins above 9%;
and (3) adheres to its conservative financial practices which include
maintaining significant liquidity and a modestly leveraged balance sheet
such that adjusted debt to EBITDA were below 1.5x on a sustained
basis.
HP's ratings could be lowered if the company (1) maintains adjusted debt
to EBITDA above 2.0x; (2) EBIT margins fall below 6%
for an extended period of time; or (3) deviates from our expectations
of conservative financial practices.
For further information, please see www.moodys.com.
Hewlett-Packard, headquartered in Palo Alto, California,
with $120 billion in revenue for the twelve months ended October
2012, is the world's largest technology firm by revenue that designs,
manufactures, and services computing and imaging systems and provides
information technology and consulting services.
The principal methodology used in rating Hewlett Packard was the Global
Technology Hardware Industry Methodology published in September 2010.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
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this announcement provides relevant regulatory disclosures in relation
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rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
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Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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Robert Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
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Moody's lowers Hewlett-Packard's senior unsecured rating to Baa1, outlook negative
