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27 Nov 2002
MOODY'S DOWNGRADES EDS LONG-TERM RATING TO A3 AND SHORT-TERM RATING TO PRIME-2; RATINGS REMAIN ON REVIEW FOR FURTHER POSSIBLE DOWNGRADE
Approximately $5 Billion Debt Securities Affected
New York, November 27, 2002 -- Moody's Investors Service downgraded Electronic Data Systems Corporation's
senior unsecured rating to A3 from A1 and its short-term debt rating
to Prime-2 from Prime-1. The ratings remain on review
for further possible downgrade.
The following ratings were lowered and remain under review for possible
Senior unsecured lowered to A3 from A1
Senior unsecured shelf lowered to (P)A3 from (P)A1
Subordinate shelf lowered to (P)Baa1 from (P)A2
Preferred shelf lowered to (P)Baa2 from (P)A3
Commercial paper lowered to Prime-2 from Prime-1
The downgrades reflect: 1) weakness within EDS's addressable
markets, which contributed to the company's sizable September
18, 2002 earnings revision, 2) the company's contract
exposure to troubled companies, including WorldCom, and sectors,
including the airline industry, and 3) the implication that these
troubled contracts, together with the cash-consuming Navy
contract, will have on free cash flow over the next twelve months
in relation to the company's debt levels.
The continued review will seek to evaluate: 1) contract quality
in greater depth, not only in cases where the customer represents
a significant credit risk, but also in cases where the customer
has experienced performance pressures of its own and may seek to reduce
the size and scope of its contract with EDS, 2) free cash flow in
a more refined analysis, and 3) liquidity, including a continued
review of rating triggers in commercial contracts, and alternate
liquidity measures EDS could undertake to improve its position such as
asset sales and securitizations. With respect to the first point,
Moody's recognizes that EDS has remedies in its existing contracts,
including make whole provisions, but believes there will be a tension
to renegotiate, which could have adverse implications for forecasted
Over the past several years, EDS' free cash flow (cash from
operations minus capital expenditures and dividends) to debt measures
have weakened considerably. Free cash flow has been negative under
this definition, as the company has booked a multitude of new contracts
that require upfront investment. For example, EDS's
very large Navy/Marine contract has required considerable investment and
usage of the network has been delayed. At the same time,
EDS has increased its balance sheet debt to around $4 billion (factoring
Moody's equity credit treatment of Feline PRIDES mandatory convertible
securities), and has been an active user of off-balance sheet
debt with its CSFT program running a balance of $640 million at
September 2002 and an annual lease expense in excess of $1 billion.
With respect to liquidity, the company has undrawn revolving credit
facilities comprised of a $625 million 364-day revolver,
which at the company's option may be converted to a term loan maturing
September 2004, and a $625 million five-year revolver,
which expires September 2004. The current availability under these
credit facilities exceeds potential obligations of $422 million
under rating triggers disclosed for the first time in the company's
September 30, 2002 10Q filing, outstanding commercial paper,
and $800 million of zero coupon convertible notes that become puttable
in October 2003. Moody's will continue to review rating triggers
in EDS' commercial contracts to evaluate the adequacy of liquidity
under a stress case scenario. The absence of funding inhibiting
prohibitions in the company's revolving credit agreements (such
as a no material adverse change representation) helps to support the reliability
of these facilities as a significant source of liquidity, so long
as EDS remains in compliance with a minimum net worth covenant.
The company is also in the process of selling its Consumer Network Services
(CNS) business to Fiserv for approximately $320 million in cash
(by definitive agreement announced November 14, 2002). Although
60% is encumbered by contractual arrangement, 40%
of EDS's $614 million of cash, cash equivalents,
and marketable securities balance is not encumbered and serves as an additional
potential liquidity source.
Electronic Data Systems Corporation, with headquarters in Plano,
Texas, is a leading provider of information technology services
Corporate Finance Group
Moody's Investors Service
John D. Moore
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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