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Rating Action:

Moody's lowers Hewlett-Packard's senior unsecured rating to A3, outlook stable

20 Jan 2012

Approximately $28 billion of debt securities affected

New York, January 20, 2012 -- Moody's Investors Service lowered all of the credit ratings of Hewlett-Packard (HP), including the senior unsecured rating to A3 from A2 and short term rating to Prime-2 from Prime-1. This concludes a review initiated October 28, 2011. The outlook is stable.

RATINGS RATIONALE

The new ratings reflect our expectations that "while we expect HP will maintain strong to leading positions in a number of product areas, the company's credit profile will remain moderately weaker than historical levels over the intermediate term," said Moody's senior vice president, Richard Lane.

Key drivers to the projected credit profile include a more aggressive financial posture that has included a large debt financed acquisition, aggressive share repurchase activity, and somewhat "weaker operating performance expected over the next few years," said Lane. Notwithstanding the clearer business strategy articulated by HP's new management, we believe the company's recent strategic inconsistency will have a negative residual effect on some customers and business partners, which will contribute to near-term performance headwinds in terms of lower revenue or higher costs.

As a result, adjusted debt to EBITDA measured 1.9x as of October 2011 as compared to historical levels of approximately 1.2x. While we expect HP will take steps to reduce financial leverage by applying a portion of our projected $7 billion in annual free cash flow toward debt reduction, we believe it will take between two and three years to reduce leverage below 1.4x.

Ratings lowered include:

senior unsecured rating to A3 from A2

subordinated rating to (P) A3 from (P) A2

preferred rating to (P) Baa2 from (P) Baa1

short term rating for commercial paper to Prime-2 from Prime-1

We anticipate HP's strong to leading positions in printers, personal computers (PC), x-86 and blade servers, and parts of its services business (over 70% of total revenue) should contribute to good, albeit moderately lower, profitability and cash flow generation over the intermediate term. At the same time, we believe HP will need to invest more aggressively in research and development and personnel in order to reinvigorate growth in parts of the company's $35 billion services business while it also seeks to reposition HP's broader portfolio into higher margin areas over time.

Although we expect HP to focus on its existing portfolio over the next year, we believe acquisitions will continue to be a necessary supplement to the company's research and development (as well as its peers) over the next few years in order to fill in product or technology gaps, however, we do not expect large acquisitions. While the less acquisitive posture reduces event risk, it 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.

We believe a broad portion of HP's portfolio including PC's, some enterprise servers, printers, and services, representing over 75% of revenue, will face slow growth prospects over the coming years. Absent strong business execution, this could place pressure on HP to become more shareholder friendly in the form of materially higher share repurchases, which could place pressure on credit ratings. We expect dividends to rise in the high single to low double digits annually.

In addition to debt reduction, modest acquisition activity, and $1 billion of annual dividends, we expect HP will use its free cash flow to buy back about $1.5 billion of common stock over the next year (offset in part by inflows from options exercises) and also to replenish cash balances so that they exceed $10 billion.

HP maintains a solid liquidity profile, with $8 billion of cash balances as of October 2011. This liquidity is buttressed by HP's $3.0 billion of debt issued in December 2011 for general corporate purposes and to prefund approximately $4.0 billion of debt maturities in fiscal 2012 ($2.5 billion in the first half and $1.5 billion in the second half). The company maintains solid alternate liquidity to support outstanding commercial paper ($3.2 billion at October 2011) in the form of a $3.0 billion bank facility maturing May 2012 (which we expect will be renewed) and a $4.5 billion bank facility maturing February 2015. Both have one financial covenant under which HP has ample room, and no need to represent as to no material adverse change.

The stable rating outlook reflects our expectation that HP will generate good profitability and cash flow during a challenging macro environment with a strategy that is focused on its existing portfolio. The outlook also reflects our expectations that HP will take consistent steps to reduce leverage while reinvesting in its businesses and that HP will not make large acquisitions.

HP's ratings are unlikely to be raised over the next year. Longer term, the ratings could be raised if the company: (1) demonstrates steady organic revenue growth; (2) sustains EBIT margins above 10%; 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 7% for an extended period of time.

For further information, please see www.moodys.com

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.

Hewlett-Packard, headquartered in Palo Alto, California, with $127 billion in revenue for the twelve months ended October 2011, is the world's largest technology firm that designs, manufactures, and services computing and imaging systems and provides information technology and consulting services.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. 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.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's 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, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's lowers Hewlett-Packard's senior unsecured rating to A3, outlook stable
No Related Data.
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