Credit analyst sees more downside for EDS on potential ratings trigger, convert put

By Ronda Fears

Nashville, Tenn., Sept. 20 - There could be more downside for Electronic Data Systems Corp. with potential ratings triggers and a put on its convertible looming, said Carol Levenson, director of research at Gimme Credit.

EDS' (A1/A-) stock fell 53% as a result of its earnings warning Thursday and Standard & Poor's downgraded the credit one notch without a watch period, the analyst noted.

"Not that losing $9.5 billion in market value and seeing its stock sink a sickening 53% wasn't damaging enough, but in this environment our thoughts turn immediately to liquidity issues," Levenson said in a report Friday.

Although EDS said that as of June 30 it is in compliance with net worth covenants in its bank agreements, the analyst said there are questions about its capital markets access and possible buybacks.

She noted that EDS said it is unlikely that rating agencies would take any action that would materially impact the cost of or its ability to issue commercial paper, or the cost or availability of committed lines of credit, but then S&P cut its rating "without even pausing to place the ratings under review and left it under review for further downgrade."

Moody's already had EDS long-term ratings on review for downgrade because of its WorldCom exposure, Levenson said, "and we imagine this week's events will prompt a more severe reaction."

EDS' commercial paper rating isn't jeopardized by the S&P downgrade, but at the next lower notch she said it would mean the commercial paper rating would go to A-2.

"Rating actions shouldn't cause EDS serious trouble unless the ratings get closer to non-investment grade, although diminished access to the commercial paper market when free cash flow is likely to remain negative for the foreseeable future is not a happy state of affairs," Levenson said.

The company's $1.3 billion in bank lines were undrawn at the end of June and the 364-day line was renewed earlier this month, she noted, but it's not a lot of money and EDS might need all of it and more.

Of some $2.3 billion in potential 2004 maturities, $1.6 billion of that is the scheduled remarketing of the EDS convertible mandatory, she noted.

The more pressing call on cash, however, is next year, she added, involves the 0% convertible bonds.

"EDS's convertible bonds have a non-investment-grade ratings trigger and a cash put in October 2003," Levenson said.

"It's possible the ratings trigger could come into play before the cash put, but either way EDS will probably need to come up with $800 million next year, in addition to borrowing to plug its cash flow shortfall.

"Meanwhile, we believe access to the bond, stock, or even stock hybrid markets would be difficult."

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