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28 Dec 2004
MOODY'S ASSIGNS ELECTRONIC DATA SYSTEMS A SPECULATIVE GRADE LIQUIDITY RATING OF SGL-1
New York, December 28, 2004 -- Moody's assigned a first time speculative grade rating of SGL-1
rating to Electronic Data Systems (EDS), indicating strong liquidity.
The rating considers its $4.5 billion of cash balances at
September 2004, expectations of improving free cash flow gross and
net of Client Financing Transaction (CFT) program draws, undrawn
external financing sources, and the company's demonstrated
willingness to divest non-core businesses to improve its liquidity
profile. The rating is assigned in the context of the company's
cash requirements over the next twelve months, including capital
expenditure requirements, upcoming debt retirement, pension
and postretirement funding, and other potential cash needs.
At September 30, 2004, EDS' cash, cash equivalents,
and marketable securities balance stood at $4.5 billion.
Because of the global nature of EDS' business, some portion
of the cash balance was located abroad. Apart from cash residing
in countries with strict withdrawal policies, the company has the
ability to repatriate the cash subject to only minor withholding taxes.
Additionally, about $350 million of the cash balance is restricted
to commercial contracts and other limitations and would not be available
for debt repayment. On May 27, 2004, EDS completed
the divestiture of its UGS PLM Solutions business for $2.1
billion, collecting about $2 billion proceeds after tax.
Since mid 2003, the company has also made other divestitures that
are not perceived to be core to its IT outsourcing and BPO operations.
The company currently maintains $1.0 billion in aggregate
unsecured committed credit facilities in the form of $450 million
and $550 million multi-year revolvers. As a condition
to each revolver draw, EDS must represent that there has been no
material adverse change to its business condition taken as a whole since
December 31, 2003. The revolving credit facilities have no
term out options and expire in September 2006 ($450MM) and March
2008 ($550MM). There are currently no outstanding amounts
under the two facilities and the company anticipates using these facilities
to issue new letters of credit and to replace existing letters of credit.
In addition to the bank facilities, the company maintains a $400
million accounts receivable securitization facility, which is subject
to availability and had no balance outstanding at September 30,
2004. The A/R facility has a December 2005 expiry and is subject
to annual renewal. Assets secured under the facility include all
eligible U.S. trade receivables up to a maximum of $400
million. The securitization facility has no rating triggers.
Financial covenant requirements associated with the company's revolver
and A/R securitization facility include a minimum net worth covenant of
$6.2 billion, a leverage ratio of 2.5 times
measured by Debt to EBITDA (which are defined terms in the revolving credit
facility), and a fixed charge coverage ratio of 1.1 times
measured by EBITDAR minus capex to fixed charges. Flexibility under
the leverage covenant remains tight at 2.27 times, at September
30, 2004. In the event that flexibility under these covenants
does not widen, EDS' speculative grade liquidity rating could
come under pressure.
For full year 2004, Moody's expects total free cash flow usage
(calculated by Moody's as cash flow from operations less capex less
dividends and reflective of the announced dividend cut) to range between
$300 million and $500 million as compared to a free cash
flow use of $98 million in 2003. The primary driver causing
free cash flow to deteriorate in 2004 is the company's decision
to terminate its Navy Client Finance Transaction (CFT) program earlier
this month. The Navy CFT program was initiated to mitigate gross
capex funding requirements as third parties provide the funding for the
contract assets. The CFT, however, represented a contingent
liability because EDS provides CFT investors with an unconditional CFT
contract performance guarantee (as opposed to a guarantee of CFT client
credit standing). Each CFT contract must perform satisfactorily
to prevent CFT contract termination or a CFT performance guarantee invocation.
Given historic performance on EDS's Navy contract, Moody's
views the termination of this securitization favorably and expects improved
transparency in assessing capital expenditures in 2005. Amounts
prepaid to Trust lenders for outstanding borrowing were approximately
Excluding the CFT repayment, positive free cash flow for the year
should range from zero to $200 million. Positive drivers
for improvement over 2003 (on an adjusted basis) are considered to be
a moderating cash flow use from the NMCI contract and the decision to
reduce the company's dividend by about 66%. The modified
divided payout will benefit free cash flow by about $100 million
in 2004 and save the company about $200 million annually thereafter.
Based upon results for the first three quarter of 2004, free cash
flow usage during the quarter should be about $400 million (Navy
CFT repayment transpired in the December quarter). Moody's
estimates cash outflows from unusual items during 2004 will exceed $1.1
billion. Unusual items include prepayment of Navy CFT, tax
payment to General Motors, U.K. pension funding related
to the Inland Revenue contract, and cash restructuring activities.
Looking to 2005, Moody's believes free cash flow will continue
to improve as the company is faced with fewer unusual cash requirements
and further progress is made on containing the Navy contract.
Moody's believes that the company's liquidity sources remain
sufficient to satisfy next twelve month cash requirements, which
include capital expenditures of approximately $300 million per
quarter, potential pension and postretirement funding, and
debt maturities of approximately $650 million.
Electronic Data Systems Corporation, with headquarters in Plano,
Texas, is a leading provider of information technology services
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
Corporate Finance Group
Moody's Investors Service
No Related Data.
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