By Ronda Fears
Nashville, Nov. 15 - Electronic Data Systems Inc.'s latest quarterly report heightens concerns about its liquidity, said Deutsche Bank Securities Inc. convertible analysts in a report Friday.
The 10-Q shows $343 million of cash and $271 million of marketable securities on the balance sheet. But the company said that "approximately 60% of our cash and cash equivalents and marketable securities were not available [as of Sept. 30] for debt repayment due to various commercial limitations on the use of these assets."
"This reduces the cash and marketable securities available to service debt to $246 million in total," said analysts Jeremy Howard, Jonathan Cohen and Robert Barron in the report.
"We conclude that the risk/reward profile of the EDS 0% 2021 remains unappealing and we continue to recommend a cautious, or suitably hedged, stance."
The obvious concern is the October 2003 put coming up on the EDS convert, which amounts to $800 million.
Also in the filing, EDS disclosed "various commitments with third parties related to services that require us to maintain specified investment grade debt ratings. In the unlikely event we were to become noncompliant with these requirements and waivers are not granted, the related commitments may accelerate and become due immediately."
"In conversation with EDS yesterday, the company verified that $170 million would be payable under these agreements if either S&P or Moody's lowered EDS's long term credit rating to below BBB+ or Baa1," the analysts said.
"An additional $252 million would be payable in the event of a further downgrade to below investment grade. EDS is currently rated A/A1 and is on review for downgrade at both agencies."
EDS has a $625 million revolver maturing in September 2003 and its outstanding commercial paper balance stood at $400 million at Sept. 30.
In looking at the current liquidity picture, the analysts said, if the $625 million revolver is either rolled over or is termed out, EDS is left with nearly $300 million after having satisfied the put. If rating triggers occur before the put date, however, the situation becomes more precarious.
If the $625 million revolver is not rolled over and is not termed out, the analysts said, EDS is short some $300 million with which to satisfy the put.
"EDS recently lost out on the large Proctor & Gamble contract as well as the JPMorgan contract," the analysts said.
"We view these two events to be credit positive, in that these contracts will not drain cash for working capital purposes away from existing bondholders, but our conclusions have not shifted since we last published on EDS."
On Oct. 3, the analysts noted that the short put offers tempting yield, but said the risk reward profile was unappealing due to the liquidity concerns.
EDS 0% convertible due 2021
| Ask price: | 75
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| Equity price: | $14.91
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| Parity: | 14.5
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| Current yield: | 0%
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| Yield to maturity: | 1.52%
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| Put: | Oct. 10, 2003
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| Put price: | 79.908
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| Yield to put: | 7.23%
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| Call: | Oct. 10, 2004
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| Call price: | 80.91
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| Conversion premium: | 417%
|
| Conversion ratio: | 9.7294
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| Conversion price: | $102.78
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