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Fitch cuts EDS
Fitch Ratings downgraded Electronic Data Systems Corp.'s senior unsecured debt to BBB- from BBB and removed it from Rating Watch Negative. The outlook is stable.
Fitch said its action followed a review focused on EDS' operating strategy to effectively support necessary new contract signings, an analysis of current problem contracts including Navy, the company's competitive position, the potential effects of rating triggers and lower financial flexibility due to market events, the timing and expected use of proceeds from asset divestitures, and the ongoing Securities and Exchange Commission investigation.
The downgrade reflects EDS' lowered expectations for cash flow from the Navy Marine Corp. Intranet deal, inability to successfully renew certain contracts, remaining problem contracts, and weak but consistent contract signings in 2003, Fitch said.
In an increasingly competitive landscape for information technology services, Fitch expects profitability, margins, and free cash flow will continue to be pressured, not just from pricing pressures from core operations but also from its reduced competitive position and the resultant loss of consistent earnings and free cash flow associated with recent asset sales.
However, Fitch believes that EDS' long-term senior unsecured rating remains investment-grade due to the company's improved liquidity position from recent asset sales, consistently positive free cash flow (unlike some similarly rated peers), the belief that bondholder protection measures have bottomed and remain solid, expected continued debt reduction and stable revenue base, the size and scale of the company, and the stabilizing of a majority of the problem contracts from 2002 and 2003.
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