Credit analyst sees higher risk associated with EDS, more downside

By Ronda Fears

Nashville, Nov. 21 - Carol Levenson, director of research at Gimme Credit, said she sees more credit risk in Electronic Data Systems Inc. and downside to the debt.

In EDS' (A1/A) 10-Q filing last week there was slightly more detail in its cash flow statement but that caused more concern rather than comfort, Levenson said in a report Thursday.

"According to our calculations, EDS had a cushion of roughly $2.2 billion under this covenant at the end of the third quarter. A pension fund hit this quarter will consume at least $350 million of this cushion," Levenson said in the report.

"Goodwill and intangibles on the books at September 30 totaled $5.5 billion, and no impairment charge has yet been taken. This is not an enormous margin for error."

She noted that a week before EDS' earnings bombshell was detonated its bank agreement was amended to include a ratings grid and corresponding loan margins.

As reported in the press, she also noted that EDS "squandered" $340 million year to date settling stock purchase contracts at an average price of $62.73 per share, a 320% premium to the current price, that was mostly financed with commercial paper.

Although EDS reported only $50 million in short-term debt at Sept. 30, Levenson noted that EDS admitted it likely will have to settle the put on its convertibles next October for $800 million in cash.

EDS recently announced an asset sale for $320 million in cash. Cash and marketable securities totaled just over $600 million, although only $200 million is available for debt repayments, and bank lines were undrawn.

"The company faces a cash obligation of $170 million if its ratings are downgraded below strong BBB by either major agency, however, and another $250 million if either rating agency downgrades it below investment grade, which is where we believe it belongs," Levenson said.

"With limited access to the capital markets, it all comes down to the banks to satisfy the company's cash needs if cash flow proves less robust than forecast. Our view of EDS's credit risk has worsened, and we see additional downside in its bonds."

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