S&P puts EDS on negative watch

Standard & Poor's said it placed its BBB corporate credit rating, BBB senior unsecured debt rating, and A-3 commercial paper rating for Electronic Data Systems Corp. on CreditWatch with negative implications.

"The CreditWatch placement reflects lowered expectations for free cash flow following EDS' announcement that it has scaled back the revenue assumptions for the Navy Marine Corps Intranet contract," said S&P credit analyst Philip Schrank. "In addition, the reduced seat deployment schedule for NMCI has required the write-down of $559 million in deferred costs in the fourth quarter."

EDS' BBB rating was based in part on the expectation that the deployment and cash flow schedule from NMCI would remain on track. Current free cash flow projections for the NMCI contract of $800 million to $1 billion through 2007 are significantly below expected levels.

S&P said that while EDS is targeting 2004 free cash flow of $500 million to $600 million, the range of free cash flow could fluctuate, based on the exposure to several other problematic contracts, the impact from stressed clients in the telecom and airline industries, and a continued weak IT spending environment. However, the company has adequate liquidity to meet near- and medium-term maturities through cash on hand, unused bank facilities, and potential asset sales.

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