EDS Said Near To Junk-Bond StatusEDS Said Near To Junk-Bond Status

A credit analyst at UBS Investment Research said on Monday that it's "highly likely" EDS will have its credit rating downgraded to "junk" status by a major credit rating agency.

UBS analyst Philip Olesen said during a conference call that he believes Moody's Investors Service is likely to downgrade EDS's corporate debt to Ba1, pushing it below investment grade. On Friday, Moody's placed EDS's Baa3 rating on review for possible downgrade; that move came one day after the IT services firm reported a fourth-quarter loss of $354 million. On Thursday, Standard & Poor's, another ratings agency, said it might cut EDS's senior unsecured debt to its second-lowest investment-grade rating.

Beyond the quarterly loss, the agencies are concerned that delays associated with EDS's seven-year, $6.9 billion contract to build an intranet for the Navy and Marine Corps is draining more cash than expected. EDS took a $559 million charge against earnings in the fourth quarter to cover deferred costs on the contract. It also said that a more-prolonged deployment schedule will reduce cash flow over the life of the deal from $1.9 billion to $900 million.

UBS IT services analyst Adam Frisch said during Monday's call that a downgrade by Moody's could make it more difficult for EDS to attract new customers. "It might be hard for a CIO to go to the board and say we want to enter into a long-term relationship with a vendor that is in junk status," said Frisch. An EDS spokesman said the firm's cash position remains strong and that a credit downgrade isn't warranted. "We still anticipate generating $500 million to $600 million in free cash flow in 2004," said the spokesman, adding that EDS is currently in discussions with Moody's over its credit rating.

Also Monday, EDS reiterated its intent to generate cash either by privately selling its UGS PLM Solutions product-management software group or selling a minority stake in the unit through an IPO. In a private sale, EDS says, it would be looking to sell the group at a price exceeding $1.8 billion--more than twice the group's 2003 revenue of about $900 million.